Federal Civil False Claims Act lawsuits pose unique issues for obtaining insurance coverage. The element of fraud necessarily alleged in Civil False Claims Act suits presents a hindrance to immediate recovery of the benefits of the policy. Moreover, when False Claims Act claims are brought by a relator in a qui tam action, the ordinary pitfalls to obtaining coverage are underscored by the statutory sealing of the complaint, which makes it impossible even to share the complaint with the insurance carrier in order to tender the claim for coverage. This article will discuss some of the unique aspects of insurance recovery issues related to False Claims Act suits and suggests certain approaches and arguments for coverage.

Available Insurance for False Claims Act Suits

Federal Civil False Claims Act suits generally assert that a corporate contractor or a governmental entity has presented fraudulent claims for payment under government contracts. Corporate contractors generally carry coverage for Directors and Officers liability, which also provides coverage for the entity. In addition, corporate contractors may have Errors and Omissions coverage for negligent or erroneous conduct, giving rise to liability. On the other hand, governmental entities carry Public Officials and Employment Practices Liability Insurance to insure the entity and its officials for liability arising from misconduct while acting in an official capacity. Both the corporate and government policies are similar in both the types of losses covered and the policy form. Each of these policy forms is written on a claims-made basis, i.e., it provides coverage only for claims actually made during the policy year. Most of these policies today also require that the claim must also be reported to the carrier in the same policy period in which the claim was made. Accordingly, when a claim is made, if notice is not given in the policy year, then the policy will expire without further coverage obligation.

These policies provide coverage for alleged consequences of conduct, i.e., “wrongful acts,” which typically are defined as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or employment practice violation by an Insured solely in the performance of duties for the [entity].” Coverage extends to damages and, generally, will not cover allegations seeking solely penalties or disgorgement of wrongfully obtained funds.  

Obtaining Coverage for False Claim Act Suits

The first step to secure coverage under a policy is to provide timely notice of the claim to the insurance carrier. This is generally done by tendering the complaint in the action to the carrier as soon as the insured learns of the action. However, in qui tam actions, the complaint is kept under seal while the Department of Justice investigates to determine if it will pursue the claim. 31 U.S.C. § 3730(b)(2003). Thus, although the complaint is brought and the action commenced, the insured cannot provide a copy of the complaint to its carrier during this investigation time period. This investigation period is prescribed to be at least 90 days, but in practice may extend well beyond that period. Indeed, the time during which the complaint is sealed may extend beyond the expiration of the policy period. Thus, the insured cannot wait until the complaint in the action is unsealed before giving notice to the carrier and, indeed, should always tender notice of the claim immediately, even if the complaint cannot yet be shared.

Some carriers have taken the position that a claim cannot be tendered without a copy of the complaint. However, it should be argued that neither the law nor the policy so provides. The complaint is not a sacred talisman, but merely the best source of information providing notice to the parties of the substance of the suit, but not the only source. A carrier’s duty to defend is “fixed by the facts which the insurer learns from the complaint, the insured or other sources. A carrier, therefore, bears a duty to defend the insured whenever it ascertains facts which give rise to a potential of liability under the policy.” Gray v. Zurich, 65 Cal. 2d 263, 276-77 (1966); see also, CNA Casualty of California v. Seaboard Surety Co., 176 Cal. App. 3d 598, 606 (1986) (“[T]he insurer must furnish a defense when it learns of facts from any source that create the potential of liability under its policy”). Thus, under the law the complaint is no more important than any other source of evidence. These other sources may include press reports prepared from the filing before the complaint was sealed, court documents that may summarize the claims or simply the insured communicating facts to the carrier. Thus, where the complaint is sealed, the insured should provide notice to the carrier by sharing immediately all the facts that are publicly available or capable of being disclosed by the insured, without revealing the relator or the complaint.

Whether the complaint is available to be shared or the insured provides notice of the claim through extrinsic facts, a carrier’s obligation to defend should be triggered immediately. Most carriers, however, will resist this notion and avoid providing a coverage position until the actual allegations of the complaint can enable them to form a comprehensive position on coverage. Carriers taking this position should be pushed to perform their obligation and reserve rights as they deem necessary. As opposed to the unsealing of the pleading, the filing of a complaint, even under seal, is the event that has substantial legal significance, as it is this point at which the insured has become a defendant and, as such, needs an immediate defense, i.e., the very purpose for which the insurance was procured in the first place. No policy requires that a copy of the complaint is necessary to trigger an obligation because it is the making of the claim, not providing a copy of the complaint, that triggers the policy. In fact, these insurance policies will typically define a “claim” as “a judicial proceeding alleging a Wrongful Act that is filed against an insured in a court of law or equity.” Thus, by the policy terms, the obligation to defend is triggered by the filing of the suit, and just because the complaint is under seal does not somehow excuse the immediate performance of the carrier where sufficient facts can be shown to demonstrate a potential for a covered claim. Any deficiency between the facts and ultimately the complaint can be anticipated by the carrier reserving rights.

Notwithstanding the legal and factual arguments and provisions, some carriers nevertheless will decline to consider tender of a suit without an actual copy of the complaint. In such cases, the insured may reserve its rights and lock in the current policy as the responsive coverage by providing what is known as a “notice of circumstances” during the policy period. When the insured learns, during the current policy year, of facts that may give rise to a claim in the future, but that potential claim has not been formally “made” during the policy year (e.g., because the complaint has not been provided to the carrier), the insured can provide the carrier with a notice of the facts of which it is aware. When the insured does this, should the claim be brought formally in a subsequent period, it will be treated as though brought during the current policy period. To this end, the policies usually contain the following language:

If during the Policy Period … an insured becomes aware of circumstances which could give rise to a claim and gives written notice of such circumstances to the [insurer], then any claims subsequently arising from such circumstances shall be considered to have been made during the Policy Period … in which the circumstances were first reported to the [insurer].

By using this process, if the carrier (wrongfully) will not consider the claim as brought until the complaint can be shared, this method will, at a minimum, preserve the insured’s position under the current policy, even if the policy expires before the case is unsealed. Clearly then, in an abundance of caution, if an insured’s policy will expire before the complaint is unsealed, and the insured has not accepted coverage based on extrinsic facts provided, the insured would be well served to always provide a “notice of circumstances” to protect its interests. Another reason to provide the carrier with notice of facts is to avoid allowing the carrier to raise a late notice defense at a later time.

Exclusions, Conditions and Limits

Once notice is given, there are numerous potential exclusions and conditions that carriers may invoke to limit or avoid their obligations. Somewhat unique to False Claims Act suits, which, by definition, allege fraudulent conduct, is the applicability of the fraud exclusion. Typically, the fraud exclusion provides that the policy:

[D]oes not apply to any Damages, or Claim … alleging fraud, dishonesty, or criminal acts or omissions; however, the insured shall be reimbursed for the reasonable amount which would have been collectible under this policy, if such allegations are not subsequently proven.

Thus, pointing to the fraudulent conduct allegations, in a False Claims Act suit the carrier will argue that the insured is not entitled to anything under the policy unless the plaintiff loses or settles the litigation. This means the carrier often will do nothing for the insured including advancing defense costs as incurred. When this happens, it should be remembered that, because the carrier is not defending nor has agreed to coverage, the insured shares no privilege with its carrier and owes no obligation to the carrier to provide information, reports or copies of ongoing bills. Responding or reporting to the carrier is not only unnecessary, it is fraught with potential difficulties. Sharing the wrong information before the carrier’s coverage is defined risks affording the carrier rights to which it is not entitled and with which it will investigate the claim to defeat coverage and jeopardize the protection of privileged information.

Where the carrier asserts that the fraud exclusion excuses its immediate obligation to pay, the insured may recover its reasonable defense fees and costs under the policy once the fraud allegations are adjudicated or settled without a finding of liability. Insureds should note that under the fraud exclusion, the carrier’s obligation is to “reimburse the reasonable amount which would have been collectible” under the policy. Thus, it should not come as a surprise that, even though the insured has mounted and paid its own defense expenses, once the carrier’s time to pay the defense costs arises, those costs will be subjected to review and possible reduction by the carrier who will inevitably urge that the costs and fees were “unreasonable.” With nothing to lose, the carrier will try to pressure their insured to accept payments for less than the full amount incurred. Insureds would be well served to use Hunton & Williams’ policyholder insurance coverage counsel, who can advise on the best ways to maximize recovery and secure payment from the carrier.

Often, however, insureds need the immediate use of the superior resources of their carrier to mount a defense in the first place, especially where the DOJ pursues the claim. State law and the terms of the specific policy will govern whether in a given case the carrier may be compelled to advance defense fees immediately. Some states, acknowledging that a defense, even of frivolous claims, is ineffective if not timely, will afford the insured the meaningful immediate use of the policy benefits, subject to recoupment if fraud is proven. Other states, which follow a strict, literal reading of the policy, consider the use of the term “reimburse” in the fraud exclusion to anticipate that the insured must pay in the first instance. Again, experienced insurance coverage counsel can provide guidance on what are the alternatives available to the insured.

Conclusion

In conclusion, False Claims Act lawsuits pose unique challenges to securing the timely benefits of insurance coverage. With qui tam actions, these will also include the difficulties posed by the complaint being sealed, rendering the complaint unavailable to be tendered to the carrier. The nature of False Claims Act suits, which demand allegations of fraud, can subject the insured to an exclusion for fraudulent conduct. While the fraud exclusion requires an actual finding of fraud to preclude coverage, it nonetheless can permit the carrier to withhold all benefits pending conclusion of the case. Reading the policy terms carefully under the applicable state’s law will determine whether defense expenses must be advanced immediately under the policy subject to a right of reimbursement. Where the carrier is declining to defend the insured, there exists no shared privilege nor any obligation for the insured to provide anything to the carrier.

It is always advisable to consult experienced insurance recovery counsel to ensure you are getting the maximum benefits under your policy and in as timely a fashion as possible. While the cost of retaining coverage counsel may not be recoverable in some states, often the fees for pursuing the benefits of a contract, i.e., insurance recovery, can be recovered as damages. In sum, triggering, maximizing and recovering the benefits of insurance policies in the False Claims Act and qui tam arenas present complex and sophisticated issues that the insured would be well advised not to oversimplify or underestimate.