Peter M. Gillon

In a recent post (here), I discussed the possibility investigative, regulatory, and enforcement actions in connection with funds disbursement under the Paycheck Protection Program. In the following guest post, Peter M. Gillon of the Pillsbury Winthrop Shaw Pittman LLP law firm takes a closer look at the kinds of claims that may arise in connection with the PPP, as well as the D&O insurance issues that the claims may present. A version of this article previously was published as a Pillsbury Client Alert. The author wishes to acknowledge the assistance of Daniel Gillon (Duke Law 2021). I would like to thank Peter for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Peter’s article.




  • In the coming months, we will inevitably see new charges brought by the DOJ against borrowers for false statements made in PPP loan applications.
  • Before signing a PPP certification, check your D&O coverage.


The Paycheck Protection Program (PPP), a key feature of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), was enacted to provide forgivable loans to certain small business and self-employed individuals demonstrating urgent financial need in the wake of the COVID-19 pandemic. (See H.R. 748 § 1102.) Loan recipients must certify their compliance with the terms and conditions of the loan, and violations expose them to a wide array of potential civil and criminal penalties, forfeiture, and other liabilities. If you or your company have already obtained, or are considering applying for a PPP loan, it is highly advisable for you to carefully review your D&O Liability Insurance Policy, as coverages for defense or ultimate liability vary significantly.


To qualify for a PPP loan, a borrower is required to make numerous certifications in its loan application concerning its business, payroll history, employee makeup and intended use of funds. Among other things, borrowers must certify in good faith that: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The Small Business Administration (SBA) and Treasury Secretary Mnuchin have signaled that they want borrowers to think long and hard before certifying the necessity of the loan. In late April, the SBA announced in #31 of its growing list of Frequently Asked Questions (FAQs) that borrowers will need to assess their current business activity and “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” As to specific examples where this certification might raise suspicions, the guidance noted that public companies with access to capital markets would be unlikely to make the required certification in good faith.


Guidance on the certification requirements also continues to shift rapidly. Recognizing the uncertainty around loan eligibility, the SBA instituted a safe-harbor presumption of good faith for borrowers who repay their PPP loans in full, which has now been extended to May 18. On May 13, the SBA also announced in #46 of the FAQs that all borrowers who, together with their affiliates, received a PPP loan of less than $2 million would be deemed to have made the necessity certification in good faith.


Just above the signature line, a borrower must also certify its acknowledgement that “knowingly making a false statement to obtain a guaranteed loan from SBA” could result in felony criminal liability, fines and imprisonment under a number of federal statutes, including 18 U.S.C. §1001 and §3571 (false statements to federal officials), 18 U.S.C. §1014 (false statements to a lending institution), 15 U.S.C §645 (misrepresentation of size status; false statements to SBA). Government enforcers may well use additional criminal statutes to maintain the integrity of the PPP loan program, including 18 U.S.C. §1344 (bank fraud) and 18 U.S.C. §371 (criminal conspiracy). These provisions regularly appear in cases involving fraud under other SBA loan programs.


Enforcement will also likely occur through the civil False Claims Act (FCA), 31 U.S.C. §3729 et seq., which imposes treble damages on offenders and per-claim penalties in excess of $21,000. Notably, the FCA provides a private right of action for whistleblowers (known as relators) in a qui tam lawsuit, in addition to the U.S. Department of Justice (DOJ). Relators have historically been company “insiders” with knowledge of the alleged fraud, however an increasing number of qui tam suits have been filed by companies against their competitors. Relators are incented to bring suits under the FCA as they are entitled to a significant portion (up to 30%) of the recovery as reward. Of relevance, the FCA also imposes liability for “reverse false claims,” which involve improper conduct to avoid paying the government or improper retention of an overpayment by the government. (See 31 U.S.C. § 3729(a)(1)(G).)


The potential for criminal and civil liability is not a mere hypothetical. On April 28, 2020, after news broke about large public companies like Shake Shack accessing PPP loans in the first wave, U.S. Treasury Secretary Mnuchin made clear that the federal government would audit all loans over $2 million, in addition to smaller loans as appropriate. On April 30, the DOJ announced it had begun a preliminary inquiry into possible instances of fraud in connection with the PPP after contacting 15 to 20 of the largest PPP conduit lenders. Finally, on May 5, the DOJ announced that it had instituted the first charges brought against borrowers for fraudulently seeking loans under the PPP. The press release notes that the defendants, two individuals, allegedly claimed to have dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses at all. The defendants were charged with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud. One of the defendants was additionally charged with true bank fraud, and the other with aggravated identity theft for impersonating a bank compliance officer in connection with his application.


In the coming months, we will inevitably see new charges brought by the DOJ against borrowers for false statements made in PPP loan applications. However, given the extraordinary dollar amount of relief funds distributed under the CARES Act, the scope of the DOJ’s inquiries will likely broaden to encompass other aspects of the PPP loan application, such as borrowers’ actual use of PPP funds. For the same reason, the PPP will likely attract additional scrutiny from Congressional committees, oversight agencies, state Attorneys General and other regulators. Finally, PPP borrowers may also see qui tam suits brought by, among others, their dissenting shareholders or even opportunistic competitors.


Potential Impacts on D&O Coverage

Companies seeking financial assistance under the PPP have ample cause for concern about their potential exposure to federal criminal and civil liability. As of May 13, at least 58 public companies have returned PPP loans totaling about $488 million—no doubt driven in part by these concerns, along with adverse publicity. However, this likely amounts to less than 20% of the publicly traded companies that borrowed through the PPP. For these remaining public companies, and the many private firms that have obtained or stand to obtain PPP loans, significant risks remain for noncompliance.


In our April 28, 2020 client bulletin, “COVID-19 Relief and Beyond: New Compliance Challenges,” we described steps companies should take to ensure compliance with obligations incurred upon receipt of CARES Act relief. Here, we add to that guidance by addressing another major question facing companies—the availability of Directors and Officers (D&O) insurance coverage for losses incurred as a result of government investigations, defense of claims brought under the PPP, and civil or criminal liability under the asserted statutes. Our guidance can be summarized succinctly: before signing a PPP certification, check your D&O coverage.


    A. Implications of governmental audits and internal investigations

All companies who received loans in excess of $2M and who retain the loan beyond the safe harbor should be aware of how their policies apply to governmental audits and investigations, given that a government audit is inevitable. Most D&O policies provide coverage for reasonable costs incurred in connection with a “pre-claim inquiry.” These are generally requests for a director or officer to appear in person before, or produce documents for, an investigatory body. Pre-claim inquiry coverage also relates to qui tam claims under the FCA, in that a company might choose to conduct an internal investigation upon notice of a qui tam complaint in advance of any formal charges by the DOJ. However, most policies limit pre-claim inquiry coverage to costs related to the defense of individual executives or employees, and not solely to the defense of the company itself, so this coverage may be of limited application.


     B. No exclusion of coverage until “final adjudication”

Companies should be aware of whether their D&O policies explicitly exclude coverage for criminal and civil charges brought in connection with the PPP loan certifications. Almost all D&O policies contain a conduct exclusion for “deliberate criminal or deliberate fraudulent acts” by the insured, and insurers may argue that the exclusion thus precludes coverage for all FCA, bank fraud, and similar claims. However, most policies’ conduct exclusions are only triggered upon a non-appealable “final adjudication” imposing liability for the deliberate act. This means that even a guilty verdict or plea of criminal liability against a borrower should not preclude defense coverage unless the borrower has exhausted all opportunities for appeal or settlement.


     C. Lack of “scienter” may avoid triggering conduct exclusion

Many of the claims likely to be brought in connection with the certifications will require the DOJ or other enforcer to ultimately prove that the borrower “knowingly” and/or “willfully” misstated information in connection with its PPP loan. (See, e.g., 18 U.S.C. §1001.) However, policyholders should be aware that liability under an asserted statute may also arise from reckless conduct that does not necessarily rise to the level of deliberate in their policy’s conduct exclusion. For example, the FCA imposes liability on any defendant who makes a false claim with knowledge of its falsity. However, the statute defines “knowledge” broadly to encompass both actual knowledge and “reckless disregard of the truth or falsity of the information.” (See 31 U.S.C. §3729.) Ironically, D&O insurers have highlighted this distinction in attempting to deny coverage for fraud liability. In Alstrin v. St. Paul Mercury, the insurer asserted that its denial of coverage for claims of “deliberate fraudulent intent” should be upheld because the policy still purported to cover securities claims based on recklessness or negligence. (See Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376 (D. Del. 2002).) Thus, even though the broad applicability of the FCA will likely result in it being heavily deployed in PPP enforcement, insurers will likely be unable to dispute coverage for a final adjudication in which liability is found to rest on, e.g., a defendant’s reckless disregard for the truth or falsity of a PPP loan certification.


     D. Repayment of PPP loan principal may be covered under D&O policy

The availability of D&O coverage for policyholders will also depend on the type of loss incurred by the policyholder. For instance, a policyholder facing a PPP investigative or enforcement action might choose or be forced to repay the loan principal and would obviously like to claim this under its D&O policy. An insurer would likely argue that such amounts constituted disgorgement of “ill-gotten gains,” and deny coverage. Depending on applicable state law and the policy language, such an exclusion may or may not apply to preclude coverage for both the repayment of loan principal as well as defense costs. For example, standard policy language defines covered “Loss” as “damages, judgments, settlements” and the cost of defense, but excludes amounts that are uninsurable as a matter of law. Carriers argue that, although they define the scope of what is covered Loss using broad undefined terms—“damages,” “judgments” and “settlements”—“public policy” prohibits them from indemnifying an insured for payment of restitution or disgorgement of ill-gotten gains. Insurers often assert this defense even when no case or statute declares such payments uninsurable.


However, Courts interpreting Delaware law (which for reasons beyond the scope of this piece generally applies to Delaware corporations) have rejected insurers’ attempts to deny coverage on this basis, holding that an insurer must meet its burden to prove that the personal conduct exclusion applies, including establishing by final adjudication that the gains were ill-gotten, before it can deny coverage on the basis that restitution is “uninsurable.” (For further discussion on the issue of whether disgorgement or restitution is insurable, see here.)


     E. Coverage for criminal or civil penalties and charges

The availability of coverage for penalties imposed for violating the PPP certification requirements may be highly variable across policies. D&O policies typically include in the definition of covered “Loss” all “damages, settlements and judgments.” But penalties may be excluded from the policy. Many policies expressly exclude coverage for criminal penalties but may cover civil penalties. Defense costs should be covered for both civil and criminal charges. On the other hand, most policies include criminal prosecutions within the definition of covered “Claim”; however, such coverage may only apply “after indictment.”


     F. Coverage for Entities vs. Individuals

Generally speaking, directors or officers who sign their names on a PPP loan application may face criminal or civil liability in their individual capacities for making a false certification. For these individuals, D&O coverage should be broadly available subject to typical conditions and exclusions. On the other hand, coverage may be more difficult to obtain for the company itself. For example, for public companies, most D&O policies only provide entity-level coverage for securities claims, which are unlikely to be implicated in PPP investigations or enforcement. And as described above, pre-claim inquiry coverage is often similarly limited to individual executives. On the other hand, private companies may have D&O policies that cover a broader set of claims.


To summarize, the availability of D&O coverage for companies and their executives will be highly dependent upon policy terms and specific circumstances.  We recommend that executives carefully review their D&O policies and internal compliance mechanisms before certifying under the PPP.  It is also advisable to consult with experienced coverage counsel to address any uncertainties.



Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.