The number of False Claims Act cases, both those filed by the government and those filed by qui tam relators, is increasing. As a result, potential False Claims Act liability is increasingly important for companies and for their D&O insurers. At the same time, there have been recent court decisions, applying an expansive reading of D&O insurance policies, that have rejected D&O insurers’ attempts to deny coverage for False Claims Act claims against their policyholders. The recent decisions suggest that companies subject to False Claims Act claims potentially may be able to obtain coverage under their D&O insurance policies – and not only for defense expense, but for settlement amounts as well. An October 26, 2021 Insurance Journal article discussing the insurance implications of the growing number of False Claim Act cases can be found here.



According to the U.S. Department of Justice’s False Claims Act statistics for the fiscal year ended on September 30. 2021, the agency filed 250 False Claims Act cases in fiscal year 2021, the highest fiscal year total since 1994. In addition, qui tam relators filed 672 False Claims Act actions during the fiscal year, the most since 2017 and among the highest annual totals ever. These statistics suggest the chances for a company to face a False Claims Act action are significantly elevated compared to recent years. These chances are particularly noteworthy for companies in the health care and life sciences industries, since over 80% of the DOJ’s False Claims Act recoveries in FY 2020 were in those industries.


Companies facing False Claims Act claims may seek coverage under their D&O insurance policies for their defense expense and for settlement amounts. The availability of D&O insurance coverage for False Claims Act claims against publicly traded companies may be limited, as the entity coverage under public company D&O insurance policies is restricted to Securities Claims. However, the entity coverage under private company D&O insurance policies is broader – specifically, it is not limited solely to Securities Claims.


There is a long history of insurance coverage disputes arising regarding coverage under D&O insurance policies for False Claims Act claims. As I have noted on this site, there are procedural aspects of False Claims Act claims (particularly relator qui tam actions) that can make these kinds of claims an awkward fit under D&O insurance policies. However, in light of the recent uptick in False Claims Act claims detailed above, it is important to note that there have been two recent judicial decisions in which the courts involved rejected the D&O insurers’ efforts to deny coverage for their policyholders’ False Claims Act claims.



Two Recent False Claims Act Coverage Decisions

The two recent decisions are Guaranteed Rate, Inc. v. Ace American Insurance Company, an August 21, 2021 decision of the Delaware Superior Court, applying Delaware law (a copy of the Guaranteed Rate decision can be found here); and Astellas US Holding, Inc. v. Starr Indemnity & Liability Company, an October 8, 2021 decision of the Northern District of Illinois, applying Illinois Law (a copy of the Astellas decision can be found here). The Guaranteed Rate decision is discussed in an August 30, 2021 post on the Hunton Insurance Recovery Blog (here), and the Astellas decision is discussed in an October 14, 2021 post on the Hunton Insurance Recovery Blog (here).


The Guaranteed Rate Decision

Guaranteed Rate, Inc. (GRI) is in the business of underwriting and issuing federally insured mortgage loans. In 2019, GRI was the subject of an investigation by the U.S. Attorney’s Office for the Northern District of New York and the Department of Justice for alleged violations of the False Claims Act. On June 27, 2019, as part of the investigation, GRI was served with a Civil Investigative Demand (CID). The CID recited, among other things, that the investigation “concerns allegations that [GRI] violated the [False Claims Act] by originating and underwriting federally insured mortgage loans that failed to meet the applicable quality-control requirements.”


The insurer denied coverage, taking the position that, among other things, the CID was not a “Claim” within the meaning of the policy, and that in any event coverage under the policy was precluded by the policy’s Professional Services Exclusion. GRI initiated coverage litigation seeking a judicial declaration that the insurer had an obligation under the policy to advance GRI’s defense expenses in the investigation. The parties filed cross-motions for partial summary judgment.


In an August 18, 2021 opinion, Delaware Superior Court Judge Mary M. Johnston granted GRI’s motion for summary judgment on several grounds. Among other things, Judge Johnston held that the CID was a “Claim” within the meaning of the policy and further that the Professional Services Exclusion did not preclude coverage.


In ruling on the issue whether the CID was a “Claim,” Judge Johnston rejected the insurer’s argument that the CID did not allege a Wrongful Act. Starting with the premise that the duty to pay defense costs “must be construed broadly, and in favor of coverage whenever factual allegations raise the possibility of liability covered by the policy,” Judge Johnston commented with respect to the Wrongful Act issue that “for purposes of determining coverage, there is no distinction between the investigation of, or actually alleging, an unlawful act.”


The Court rejected the insurer’s argument that the policy’s Professional Services exclusion precluded coverage for two reasons. First, Judge Johnston referred to an earlier case in which a different unit of the defendant insurance company had expressly taken the position that the alleged false mortgage submissions to HUD were not “professional services” under a policy specifically designed to provide professional services liability. Judge Johnston observed that in the GRI case, the insurer’s position that the GRI’s mortgage services were professional services “directly contradicts” the “previous position” that the insurer took in the earlier case.


Second, Judge Johnston found that though Professional Services Exclusion was “drafted broadly” (that is, it had the broad “based upon, arising out of” preamble), the policy did not define the term “Professional Services.” Judge Johnston noted that the alleged misconduct under investigation was whether GRI failed to meet applicable quality-control standards in originating federally insured mortgage loans. The satisfaction of the quality control standards was owed to the federal government, not to mortgage borrowers, and satisfaction of quality control standards is not a “professional service” owed to “borrower clients” that could be excluded by the policy’s professional services standard.


The Astrellas Decision

Astrellas is a pharmaceutical company. Astrellas made charitable donations to charity programs that helped patients with the health insurance co-pays. In 2016, the DOJ initiated an investigation into whether Astrellas’s charitable donations represented a form of prohibited kickback. In March 2016, the DOJ served Astrellas with a subpoena, and in September 2017, the DOJ served the company with a Civil Investigative Demand that issued pursuant to the False Claims Act to determine whether the company had caused the submission of false claims with the federal government. The company ultimately entered a settlement with the government pursuant to which the company agreed to pay $100 million plus interest. Among other things, the settlement agreement recited that $50 million of the settlement amount represented “restitution to the federal government.”


Astrellas submitted the investigation to its insurers as a claim. The insurers denied coverage for the claim, and Astrellas initiated coverage litigation. Astrellas ultimately settled with two of the insurers, and so the coverage lawsuit proceeded solely as to one of its excess D&O insurers. As the court later said, the “crux” of the insurance coverage dispute with whether the settlement amounts represented “Loss” under the policy. The parties filed cross-motions for summary judgment.


In a detailed October 8, 2021 opinion, Northern District of Illinois Judge Franklin Valderrama granted Astrellas’s motion and denied the insurer’s motion, holding that the settlement payment “constitutes a Loss under [the insurer’s] policy, and that public policy does not bar coverage.


In making these rulings, Judge Valderrama first rejected the insurer’s argument that the “restitution” label in the settlement agreement was controlling. After first noting that the dictionary definition of “restitution” includes both “disgorgement” and “compensation,” Judge Valderrama examined the purposes of the settlement agreement’s use of the term “restitution.” The record, Judge Valderrama, was undisputed that the sole purpose of identifying the $50 million as restitution was to comply with the Tax Cuts and Jobs Act of 2017, in order to classify certain payments for tax reasons. Judge Valderrama concluded that the settlement agreement’s reference to “restitution” did not support a finding that the government sought disgorgement of profits from the company.


Judge Valderrama found further that the False Claims Act does not even permit the federal government to seek restitution in the form of disgorgement, but that rather the Act provides only for the recovery of civil penalties and compensatory damages. Judge Valderrama further rejected the insurer’s argument, made in reliance on the well-known Level 3 case, that the purpose of the settlement was to divest Astrellas of the “net benefits” of its misconduct. The damages the government sought was primarily compensatory damages under the False Claims Act for the government’s own  losses, rather than for the return of the company’s profits for the alleged wrongdoing.


Finally, Judge Valerrama rejected the insurer’s arguments that Illinois public policy prohibited the insurance of merely alleged fraudulent misconduct where there are no admissions of wrongdoing or liability.



As the positions of the insurers involved in these two cases show, D&O insurers will often contend, under a variety of theories, that there is no coverage under their policies for defense costs and settlements incurred in connection with the investigation and prosecution of False Claims Act cases. The two cases discussed above show that companies that are the targets of False Claims Act matters can, at least in some circumstances, overcome the insurer’s coverage denials and establish that there is coverage under their D&O policies for these types of claims.


To be sure, these cases do not establish that there will always in all circumstances be D&O insurance coverage available for False Claims Act actions. The courts’ rulings in both of the cases discussed above depended to a significant extent on the factual circumstances involved. Nevertheless, the cases do show that in appropriate circumstances policyholders may be able to establish coverage under the D&O insurance policies for False Claims Act claims.


There are several other important takeaways from these cases as well. First, the Astrellas case shows that labels alone are not coverage determinative. It is very significant that the court in Astrellas was prepared to look beyond the label to establish the purposes for which the parties labeled a portion of the settlement as “restitution.”


Second, it is also important that Judge Valderrama expressly found that the False Claims Act does not even permit the federal government to seek the disgorgement of supposedly ill-gotten gains. The only remedy the Act permits, Judge Valderrama found, is the recovery of damages. While this determination is only the ruling of a federal trial court judge, and therefore has only persuasive but not precedential authority, it nevertheless provides substantial ground from which other policyholders can argue that the False Claims Act action settlement amounts do not represent disgorgement amounts for which coverage is not permitted. By the same token, it is important that Judge Valderrama concluded that the insurance of the settlement amounts, where the alleged fraudulent misconduct was merely alleged but not proved or admitted, is not prohibited under Illinois public policy. This conclusion may also be helpful for other policyholders seeking to establish coverage for False Claims Act settlement amounts.


Third, Judge Johnston’s ruling that the Civil Investigative Demand is a “Claim” under the Policy is also significant. Whether CIDs (or subpoenas) represent claims is one of those perennial issues that seems to come up regularly, and never seems to go away. Other policyholders in the future undoubtedly will find themselves trying to argue with their D&O insurers that the Civil Investigative Demand (or subpoena) they are dealing with represents a “Claim” within the meaning of their D&O insurance policies; Judge Johnston’s ruling on that issue will be helpful in that regard, at least in certain circumstances.


Fourth, Judge Johnston’s holding that coverage for False Claims Act claims is not prohibited by the Professional Services Exclusion is also significant, particularly given that the exclusion involved had the broad “based upon, arising out” preamble language. I will say that for me, the insurer’s attempt to rely on the Professional Services Exclusion is yet another example of a point I have frequently made, which is that many insurers’ attempts to rely on the Professional Services Exclusion is one thing that insurers regularly get wrong. The fact that the policyholder was able to show that the insurer had taken the exact opposite position in another case (that is, the insurer had argued in a prior case that the precise kinds of actions involved did NOT represent professional services) shows how loose insurers’ attempts to rely on this exclusion can be.


As Judge Johnston noted (citing language from a prior decision with approval) that the Professional Services Exclusion was “drafted so broadly that virtually any aspect of Plaintiff’s business would be ‘related’ to rendering ‘professional services’ which conceivably would preclude coverage for all claims made under the Policy.” Other courts, she noted, “have commented that interpreting exclusionary provisions so broadly as to vitiate all coverage undermines the purpose of having an insurance policy.” That is the very reason that I have long contended that the Professional Services Exclusion should not be written with the broad “based upon, arising out of” preamble, but rather should only be written with the “for” wording, so that all the exclusion can do is preclude coverage for claims that properly belong under a professional services E&O policy, rather than allowing insurers to take broad sweeping coverage positions denying coverage for claims that properly ought to be insured under the D&O insurance policy.


In any event, these two recent policyholder-favorable decisions could prove to be helpful for many companies. As I noted at the outset, the number of False Claims Act actions has been increasing in recent years, so these kinds of issues could prove to be important for an increasing number of companies as the levels of False Claims Act activities increases. The rulings discussed above could be important for companies facing False Claims Act investigations or actions, as they seek to establish coverage under their D&O insurance policies for their defense costs and settlement amounts incurred in connection with the investigations or actions.