March 4, 2015
(http://www.corpcounsel.com/from-the-expert/id=1202719554645/Insurance-Coverage-for-False-Claims-Acts-Lawsuits?mcode=1202615461980&curindex=0)
By Joseph M. Saka, Corporate Counsel
Companies that have business dealings with the U.S. government need no introduction to the False Claims Act. Broadly speaking, the FCA prohibits making false claims to obtain payment from the federal government. Virtually no industry is immune from FCA claims. The FCA implicates all government contracts, including defense contracts, construction contracts, and various government programs such as federally insured loans and mortgages, education grants and Medicare.
The U.S. Department of Justice has recovered billions of dollars in FCA lawsuits. In October 2014, a federal jury handed down a $175 million verdict against Trinity Industries, which was accused of making false claims in connection with the installation of highway guardrails. With the potential for trebled damages, attorney fees and penalties under the FCA, that figure could increase.
The prevalence of FCA claims against companies is compounded by the fact that private persons—called “relators”—are able to file FCA suits on behalf of the government (i.e., qui tam suits), and can receive up to 30 percent of any recovery. In recent years, the FCA has been further bolstered by amendments that provide additional inducements and protections to qui tam plaintiffs.
One way that companies may be able to minimize their risk in the event of FCA claims is through liability insurance. Depending on the nature of allegations, and perhaps more importantly, the company’s response to those allegations, insurance coverage may be available to cover all or a portion of the company’s defense costs and loss.
Preparing for FCA Claims
Claims under the FCA primarily implicate three types of liability insurance: (1) directors and officers (D&O) liability insurance; (2) employment practices liability (EPL) insurance; and (3) errors and omissions (E&O) insurance. Although the three types of policies provide different coverages, each commonly covers loss resulting from a claim for wrongful acts (as defined in the policy).
Because the definitions of these terms differ from policy to policy, it is important to be aware of how these terms are defined. The term “claim,” for instance, often is not limited to the filing of the lawsuit, but may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “claim” includes government investigations and informal investigations. The definition not only sets the parameters for what is covered, but also may affect the policyholder’s notice obligations discussed below.
In many instances, it may be beneficial for policyholders to procure insurance policies with a broad definition of “claim,” but policyholders should take note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.
Likewise, the definition of “loss” often is important. To maximize protection for FCA claims and avoid disputes with the insurance company, the definition should expressly include fines and penalties and the multiplied portion of any award. Similarly, policyholders should avoid definitions of “loss” that exclude “matters uninsurable.”
Exclusions
Policyholders also should anticipate that insurers may attempt to avoid their coverage obligations by asserting that exclusions in the policies apply. Although it is impossible to predict all policy exclusions that insurers may attempt to assert, insurers often have raised several exclusions as a bar to coverage for FCA claims. These include the following:
Conduct-based Exclusions: These include exclusions that limit coverage based on an insured’s alleged misconduct, such as exclusions for illegal personal gain, dishonest acts or fraudulent or illegal conduct. To maximize the potential for coverage, policyholders should request that any conduct-based exclusion be removed or, at a minimum, limited to instances in which intentional misconduct is established by final adjudication. In such cases, the conduct-based exclusions generally will not relieve the insurer’s defense obligations, regardless of how egregious the allegations of misconduct, nor preclude coverage in the case of settlements. Policyholders also should examine closely the allegations of any underlying complaints: If any of the claims in the underlying case are based on nonintentional conduct, a conduct-based exclusion likely will not absolve an insurer of its duty to defend. For instance, recently an Illinois federal judge ruled that an insurer had a duty to defend two gun manufacturers, Sigmatek and Marathon Technologies, in a lawsuit alleging FCA violations in connection with contracts to sell the U.S. Army gun mounts and tripods. The judge found that the complaint contained allegations sufficient to support a claim for relief for wrongful employment practices. U.S. Liability Ins. Co. v. Sigmatek Inc. (N.D. Ill. Feb. 20, 2015).
“Prior Acts” or “Prior Litigation” Exclusions: These include exclusions for claims relating to wrongful acts that occurred prior to a specific date set forth in the policy, or for claims relating to a specified claim or circumstance. These are particularly dangerous in the context of FCA claims because qui tam suits are preliminarily filed under seal, and policyholders may not know about a lawsuit until years after it was filed. Policyholders therefore should be cognizant of any prior acts exclusions and their impact on any existing but unknown claim, and attempt to limit the application of such exclusions by carving out FCA claims filed under seal and unknown to the alleged wrongdoer.
Policyholders cannot anticipate all potential exclusions or other defenses that an insurer may assert in the event of an FCA claim, but counsel should note these common issues at the procurement stage and, where necessary, seek to address them.
Responding to FCA Claims
Counsel must have a strong grasp on what needs to be done in the event a claim is made. Many policyholders have foregone millions of dollars in coverage by failing to provide proper notice.
Counsel and risk managers carefully should read policy terms and conditions regarding notice requirements in the event a claim is made, and comply with those terms and conditions to the letter. For FCA claims, however, there is an additional complexity. As discussed above, under the FCA, qui tam suits are preliminarily filed under seal. In some instances, policyholders may first learn about the lawsuit through an investigatory subpoena by the Department of Justice. Depending on the policy language—and, specifically, the definition of “claim”—the investigatory subpoena itself may constitute a “claim” and trigger a policyholder’s obligation to provide notice.
One also must be mindful of any policy requirements for retaining defense counsel. Some policies, for example, require insurer approval prior to incurring defense costs. Additionally, in some instances insurers improperly may attempt to impose billing guidelines on policyholders that make it increasingly difficult for policyholders to recover their defense costs. Such guidelines generally are not part of liability insurance policies, and policyholders usually should not accept them without discussion and mutual agreement on the terms.
Resolving FCA Claims
Many FCA lawsuits are resolved by settlement. Insurance coverage issues are particularly crucial during the settlement negotiation process.
One issue that often arises is a requirement in policies for policyholders to obtain the insurer’s consent prior to settlement. Despite this requirement, when the insurer is not providing a defense or paying defense costs, many states permit policyholders to settle a claim without consent, so long as the settlement is reasonable. Policyholders should proceed with caution and evaluate the potentially applicable insurance law before entering into such settlements.
Unless all of the claims in the FCA complaint are covered, another common issue at the settlement stage is whether the entire settlement will be covered when there are both covered and uncovered claims asserted. Many liability insurance policies contain allocation provisions to address these issues. For instance, some policies contain allocation provisions that require insurers and policyholders to use their “best efforts” to allocate between covered and uncovered claims.
Conclusion
Regardless of the industry, companies that have business dealings with the federal government face the risk of FCA investigations, allegations and lawsuits. To manage these risks, companies should make sure they (1) have appropriate liability insurance in place, given their risk profile; (2) respond in a manner that does not jeopardize their coverage if a FCA claim is asserted against the company; and (3) carefully consider insurance coverage issues prior to resolving an FCA lawsuit.
Joseph Saka is counsel in Lowenstein Sandler’s Washington, D.C., office. He represents businesses in disputes with their insurance companies and helps clients maximize the value of their insurance assets. The views expressed in this article are his, and are not necessarily the views of the firm or any of its clients.
