False Claims Act Litigation and Implications for D&O and Professional Liability Insurers

The Federal False Claims Act -- 31 U.S.C. §§ 3729-3733 (the ''FCA'') permits private plaintiffs to pursue claims on behalf of, and sometimes with the intervention of, the U.S. Department of Justice (''DOJ''), against those presenting fraudulent claims for payment to the government. In recent years, FCA suits and the associated penalties are on the rise. In 2016 alone, over 800 new FCA cases were filed (the second-highest number to date), the DOJ recovered $4.7 billion, and penalties were doubled. Key industries historically affected by these suits include: healthcare (Medicare/Medicaid billing issues), education (student loans/grants), banking (mortgages and government-funded lending programs), and government defense contracts. However, these claims can involve any organization receiving payment for goods or services provided to the government. Noteworthy settlements and recoveries in 2016 include a $513 million payment by a hospital network, a $145 million payment by a nursing facility, a $125 million payment by energy department contractors, and a $92 million award against mortgage originators. The DOJ, consistent with the directives in the September 2015 Yates Memo, is focusing on individual wrongdoers and has secured multi-million dollar recoveries from those personally involved in the fraud.

With the increasing frequency and severity of FCA litigation, it is no surprise that companies look to their various insurance policies to help cover costs associated with these claims. FCA lawsuits present a number of issues for insurance coverage under Directors & Officers and Professional Liability lines of coverage, as highlighted in several noteworthy decisions.

1. General Background on the FCA

   Key provisions in the FCA provide liability for any individual or organization that knowingly presents or conspires to present a false or fraudulent claim for payment to the government or uses a false record or statement that is material to such claim.1

   Because it would be impossible and prohibitively expensive to monitor all government transactions, the qui tam provisions of the statute allow whistleblowers, also known as relators, to pursue claims on behalf of the government and reap part of the recovery obtained. Relators file complaints under seal in federal court, at which point the DOJ investigates and decides whether to intervene in the case. If the DOJ intervenes, it leads the litigation, but the relator still remains involved. If the government declines to intervene, the relator may continue to litigate on behalf of the government. As a reward, the relator will receive 15% to 30% of any government recovery, even if the DOJ intervenes.

   The statute allows for recovery of treble damages, civil penalties,2 and all attorney fees and costs in pursuit of the claim, which incentivizes plaintiffs' counsel to pursue these claims.

   In addition to the FCA, many states and some municipalities have similar provisions, some of which are limited to the healthcare sector while others parallel the Federal statute to recover any payments made by the government on a fraudulent premise.3

2. ''Knowing'' Violations and Intentional Conduct

   A defendant must ''knowingly'' violate the FCA in order to be liable. The statute defines knowingly to mean that a person has actual knowledge of the information, and acts in deliberate ignorance of the truth or falsity of the information or acts in reckless disregard of the truth or falsity of the information. The statute states that ''knowingly'' does not require specific intent to defraud.

   Some FCA suits naturally involve a clear intent to defraud the government. Most insurance policies exclude liability for fraudulent acts perpetrated by insureds. Often, these exclusions carve out defense costs and insurers will defend their insureds or advance costs until there is a final adjudication of liability against...