nystate1As I have noted in prior posts, “qui tam actions” under the False Claims Act often fit uncomfortably with typical D&O insurance policy terms and provisions. For example, the procedure whereby qui tam actions are filed but not immediately served raise questions of the claims made date (as discussed here), and with respect to the potential applicability of the prior and pending litigation exclusion (as discussed here).


In addition, as discussed in a recent case in the New York Supreme Court Appellate Division (First Department), a “qui tam action” pursued by the “relator” (a private third party claimant pursuing the False Claims Act claim individually) also raises questions about who the real party in interest is and how that could affect the availability of coverage under a D&O insurance policy.


In an April 30, 2015 decision (here), the New York intermediate appellate court held that even though the qui tam action claimant was pursuing the action individually, the government was the “real party in interest,” and therefore coverage for the action was precluded under the qui tam action defendant company’s D&O insurance policy’s regulatory exclusion.


As discussed below, this case presents yet another example of the problems that qui tam action under the False Claims Act can present for purposes of D&O insurance coverage. As discussed below, the question whether the exclusionary language at issue appropriately could be interpreted to preclude coverage for a qui tam action maintained by a relator is far from clear.


A May 19, 2015 post about the ruling can be found on the Wiley Rein law firm’s Executive Summary Blog, here.



As discussed here, the federal False Claims Act imposes liability on those who defraud the government. The law also allows third-parties to bring qui tam actions in the form liability claims under the Act; if the qui tam actions are successful, the third-party can receive a portion of the recovery. When a third-party files a qui tam action, the Act requires that the complaint remain under seal for at least sixty days and that it “not be served on the defendant until the court so orders,” so that the government can decide whether it wants to intervene and pursue the action. Even if the government declines to intervene, “the person who initiated the action shall have the right to conduct the action.” The person who pursues this type of claim is referred to as the “relator.”


Huron Consulting Group (HCG) was named as a defendant in a qui tam action. The action alleged that HCG had violated the federal False Claim Act and the New York False Claims Act in connection with excessive Medicare and Medicaid billing. The government declined to participate in the action; the relator continued to pursue the action individually.


BCG sought coverage under its D&O insurance policy for the defense expenses it incurred in defending the claim. The D&O insurer denied coverage based on the applicable policy’s Regulatory Exclusion. The Regulatory Exclusion provides in pertinent part that there is no coverage for Loss in connection with claims “brought by . . . any federal [or] state . . . governmental entity, in such entity’s regulatory or official capacity.” The insurer filed an action in New York state court seeking a judicial declaration that the exclusion precluded coverage.


The trial court denied the insurer’s motion for summary judgment and granted BCG’s cross motion for summary judgment that the insurer was obligated to pay BCG’s defense costs. The insurer appealed.


The April 30 Opinion 

In an April 30, 2015 per curiam opinion, a unanimous five-judge panel of the New York Supreme Court Appellate Division reversed the lower court, ruling instead that coverage for the relator’s qui tam action was precluded by the policy’s regulatory exclusion.


In reaching its decision, the appellate court said that the trial court had erred in concluding that “the underlying qui tam lawsuit was brought by a private party, not a governmental entity operating in an official or regulatory capacity.” Rather, the appellate court said that while relators indisputably have a stake in the outcome of False Claims Act qui tam cases that they initiate, the Government remains the “real party in interest” in any such action.


The appellate court quoted a prior Second Circuit decision in which the federal appellate court said with respect to qui tam actions, even qui tam actions pursued and maintained by a relator rather than by the government, that “It is the government that has been injured by the presentation of such claims; it is in the government’s name that the action must be brought; it is the government’s injury that provides the measure for the damages that are to be trebled; and it is the government that must receive the lion’s share-at least 70%-of any recovery.” Because the U.S. government is the real party in interest, the regulatory exclusion applies to preclude coverage under the policy for the qui tam action.



As I noted at the outset, and as I have noted in prior posts, qui tam actions fit awkwardly within the terms and conditions found in the typical D&O insurance policy. But while that awkward fit is a recurring problem, the outcome of this case goes beyond the standard awkwardness for these types of claims. The contention that the Regulatory Exclusion precludes coverage here is not self-evident, and a good case could made that the exclusion does not and was not intended to preclude coverage for this type of claim.


The exclusion precludes coverage only for claims brought “by” a governmental entity. Under the standard procedures for qui tam actions, the government had the opportunity to decide whether it would participate in the action. If the government had decided to intervene, then the action obviously would have been brought “by” the government. But the government chose not to intervene, and to me that clearly makes a different with respect to the question whether the action the relator continued and maintained was “by” the government.


It may well be that in a qui tam action maintained by a relator that the government is the real party in interest. That is, the qui tam action is clearly brought “on behalf of” the government. But the regulatory exclusion doesn’t preclude coverage for claims brought “on behalf of” the government; it only precludes coverage for claims brought “by” the government. The significance of the absence of the “on behalf of” language is underscored  by the fact that other standard D&O exclusions and policy provisions typically refer to actions brought “by or on behalf of” a specified party. The standard policy language used in these other provisions show that when an insurer intends to preclude coverage for claims brought “by or on behalf of” someone, there is language at hand for the insurer to use to do so. The insurer did not use this language in this regulatory exclusion, and that is an important – and to my mind, dispositive – difference.


If the insurer omits to include exclusionary language precluding coverage for claims “by or on behalf of” someone,  but instead uses only exclusionary language precluding coverage only for claims brought “by” someone, then the only way the exclusion can or should apply is if the claim was in fact brought “by” the identified person (in this case, a governmental entity). The exclusion should not apply if the action was brought and is maintained by a third party relator,  even if the government is the real party in interest, because even if the relator’s claim is indisputably “on behalf of” the government, the relator’s claim just as indisputably is not “by” the government.


If the carrier really does intend to preclude coverage for these types of claims, it should have to either expressly exclude coverage for qui tam actions maintained by relators or specify that its exclusion precludes coverage not only for actions brought “by” the government, but actions brought “on behalf of” the government. In the absence of these kinds of provisions, the policy exclusion should not apply to and there should be coverage under the policy for the relator’s qui tam action.


UPDATE: An informed source advises that the exclusion at issue in fact included the “on behalf of” language, which for some reason the court did not seem to think was important. It certainly changes my view of the outcome of this case, although the Court’s analysis standing alone still leaves me cold. 


If there is any good news here, it is that it is relatively rare for D&O insurance policies to include a regulatory exclusion of the type involved here. Typically regulatory exclusions are only found in D&O insurance policies of commercial banking institutions and some other types of financial institutions. Indeed, even for commercial banks’ D&O insurance policies, the inclusion of a regulatory exclusion is relatively unusual except for financial troubled institutions. In my view, coverage for a qui tam action maintained by a relator should not be precluded by a regulatory exclusion unless the exclusionary language expressly precludes those types of claims or the exclusion specifically states that coverage is precluded for claims brought “by or on behalf of the government.” Coverage should not be precluded for qui tam actions maintained by a relator where the regulatory exclusion precludes coverage only for claims brought “by” a governmental entity.