The Trump Administration has already shown that it intends to use the False Claims Act (FCA) as one of the primary tools in its arsenal to enforce its policy priorities. For example, as discussed in prior posts on this site (most recently here), the administration is actively using the FCA to enforce its tariff policies. In the latest demonstration that the FCA may now be the administration’s preferred enforcement tool, the administration appears to be actively gearing up to use the FCA as a primary weapon in its campaign against “illegal DEI,” in an apparent use of the FCA commentators agree would be, at a minimum, “novel.” The administration’s use of the FCA for these purposes could pose significant challenges for companies — and their insurers.
Background
From the very outset of the current Trump administration, the White House has signaled that it intends to target “illegal DEI.” As I outlined in detail in my recent round-up of the top D&O stories of 2025, at the very outset of the current administration, the White House issues two Executive Orders targeting “illegal DEI.” The Attorney General separately issued a memo prioritizing the campaign against “illegal DEI.” And in June 2025, the new head of the DOJ civil rights division announced as part of its “Civil Rights Fraud Initiative” that the agency would “utilize the False Claims Act to investigate, and as appropriate pursue claims against any recipient of federal funds that knowingly violates federal civil rights laws.”
The False Claims Act (FCA) is of course a Civil War era law designed to impose liability on persons and companies (typically federal contractors) that defraud the federal government. Its qui tam provisions allow whistleblowers (known as “relators”) to file actions against alleged wrongdoers on behalf of the federal government. The relator’s action is stayed to allow the government to decide for itself whether or not it wants to pursue the claim; even if the government chooses not to pursue the claim, the relator, if the claim is successful, could stand to benefit from a substantial portion of any recovery.
According to a December 31, 2025, memo from the Freshfields firm entitled “The False Claims Act: The Newest Tool in the DOJ’s DEO Enforcement Toolkit” (here), “2026 may very well be the year of increased enforcement” against “illegal DEI” policies.
Indeed, a December 28, 2025, Wall Street Journal article entitled “Justice Department Using Fraud Law to Target Companies on DEI” (here), the DOJ has already launched investigations of diversity initiatives in hiring or promotion at major U.S. companies. Among the companies specifically mentioned are Alphabet’s Google and Verizon Communications. Other companies being scrutinized come from industries “ranging from automotive and pharmaceuticals to defense and utilities.”
Discussion
There are several things to consider in thinking about the Trump administration’s apparent planned use of the FCA as part of its anti-DEI campaign.
The first is the way the administration’s apparent investigations are coming about. Historically, and typically, FCA investigations originated from whistleblower initiatives. By contrast, the administration’s current use of the FCA as part of its anti-DEI initiative is, according to the Journal, being spurred by “politically appointed officials in the [DOJ] who believe companies with [federal] contracts aren’t abiding by their obligations to the government if they still embrace diversity, equity, and inclusion programs.”
The second is that the administration’s apparent intent to use the FCA as part of its anti-DEI campaign is, according both to the law firm memo and the Journal article, “novel.” The Journal article cites unnamed lawyers who practice in the area as saying that “it is unusual to see the antifraud law used to pursue hot-button conservative policy objectives.” One lawyer is quoted as saying that she has “never seen the government use its false-claims authority to pursue concerns about compliance with the federal antidiscrimination laws.”
To the contrary, in the past, federal contractors’ employment practices were, according to the law firm memo, guided by longstanding legal and contractual frameworks that often required or encourage contractors to maintain affirmative action and equal employment policies. The Trump administration’s use of the FCA as an anti-DEI enforcement tool has “turned this paradigm on its head.”
Third, if the Trump administration were to pursue FCA claims as part of its anti-DEI campaign, it could, according to the Journal article, “be difficult to prove in court.” Legal observers quoted in the article say that “because the government will have to show that a company made a misrepresentation when it secured its government contract and submitted a claim it should have known was false.” Indeed, according to the law firm memo, the DOJ itself has taken the position, at least in the past, that the FCA does not reach innocent, good-faith mistakes about the meaning of an applicable rule. An added difficult for the government proceeding on this theory, according to the law firm article, is that “there is not comprehensive definition of what it means to engage in ‘illegal DEI’.”
It appears that to date the Trump administration has not yet brought any anti-DEI enforcement actions based on the FCA. It may be that the administration has no intent to do so. It may proceed as it did last year in its campaign against colleges, universities, and law firms – by sending threatening letters, seeking to compel negotiations that result in commitments from the target firms to adopt policies consistent with the administration’s approach (and also – as always in connection with the current administration – pay a lot of money.)
In its article about the DOJ’s anti-DEI FCA investigations, the Journal states that just the DOJ’s investigative efforts have “rattled the corporate world” because “the financial consequences can be significant.” Among other things, if the DOJ were to bring an FCA action and prevail, the defendants could be liable for treble damages (although – just an aside here – what exactly would the damages be in this situation and how would they be calculated?) The law firm memo also notes that “the reputational and operational risks of an FCA investigation remain substantial, even if ultimate liability is unlikely.”
From a D&O insurance perspective, there are many concerns here. The first is, as I have noted previously on this site (most recently here), FCA claims are an awkward fit with the typical D&O insurance policy. There is in fact a long history of D&O insurance coverage disputes arising in connection with underlying FCA claims. (Refer, for example, here.) Notice timing issues are common. Coverage for FCA claims under public company D&O insurance may be limited because the FCA claims are typically entity only claims, but the public company D&O insurance policy provides coverage only for securities claims (which the FCA action is not). The D&O insurers often contend that FCA claims are essentially non-covered contract disputes, or stem from excluded professional services liability issues.
Notwithstanding all of this, there arguably is increasing authority that D&O insurers must cover FCA claims (as discussed, for example, here and here). A detailed recent memo from the Covington law firm discussing these policy coverage issues can be found here.
There is an added risk here, both for the defendant companies and for their insurers. And that is the possibility that a regulatory False Claims Act claim can lead to a follow-on securities class action lawsuit. As discussed here, last spring a False Claims Act defendant was the target of a plaintiff shareholder’s follow on securities lawsuit. As I noted at the time in connection with the follow-on suit, “the new follow-on lawsuit suggests that D&O insurers will want to consider the implications of the administration’s active deployment of the FCA as an enforcement tool.” A FCA follow-on securities suit arguably would involve very different D&O insurance coverage implications.
There is one further wild card here that is worth thinking about as a final note. The final note is that – at least traditionally — the vast majority of FCA actions originate as whistleblower complaints. As discussed here, at least one federal district court judge has held that the qui tam provisions of the FCA are unconstitutional. The court’s theory is that the whistleblower (relator) has suffered no direct harm, and because of the limitations of the Constitution’s Appointments clause, the relator cannot act on behalf of the U.S. government. As I previously discussed, I have my doubts about this holding, which I understand is still on appeal. However, it would be a wild outcome to this whole sequence of events if it were to result in the end to a firm holding that the FCA itself – or at least its qui tam provisions – are unconstitutional. I understand that the prior district court ruling remains on appeal.
In any event, the full story of the current administration’s use of the FCA as part of its anti-DEI campaign will be told in the months ahead. It seems likely that there will be a lot more ahead on this topic.
Failure to Maintain Insurance?: Those with long memories can remember a time when D&O insurance policies often included a ‘failure to maintain insurance” exclusion. Indeed, I have even in the past had occasion on this blog to write about failure to maintain insurance coverage disputes, here. As discussed in greater detail in my prior post, it is unusual these days to see a D&O insurance policy with a failure to maintain insurance exclusion (referred to in the old days as an FTMI exclusion).
I still get questions these days – usually presented in the form of a hypothetical – about the possibility of a failure to maintain insurance/sufficient insurance kind of claim. These questions are presented as hypotheticals because many cannot come up with an actual example of this kind of claim.
For those who are interested in these kinds of things, I wanted to pass along an example of an actual failure to maintain insurance claim – or at least a variant of this kind of a claim. The example occurs in the complaint in a securities class action lawsuit filed on January 7, 2026 in the Middle District of Tennessee against Ardent Health and certain of its executives. A copy of the complaint can be found here. The allegations in the complaint mostly concern the defendant company’s alleged misrepresentations with respect to its accounts receivable. But amidst the accounts receivable related allegations, there is definitely a failure to maintain sufficient insurance claim.
The complaint specifically alleges, among other things, that the company, a health care services company, represented that it “maintained professional malpractice liability insurance in amounts ‘sufficient to cover claims arising out of [its] operations.’” The complaint alleges that in “in truth, the company did not maintain professional malpractice insurance in amounts sufficient to cover claims” in light of “significant social inflationary pressure in medical malpractice cases the past several years” which had been an “increasing dynamic year-over-year” in the company’s market.
These allegations are interesting in light of the continuing concerns about failure to maintain insurance claims generally. They are also interesting in the context of discussions with insurance buyers about insurance limits selection. Deciding how much insurance is enough insurance is always a complex discussion involving many factors. Often cost is a significant factor, sometimes even a deciding factor. The possibility of a D&O claim based on an alleged failure to purchase sufficient insurance arguably is another relevant factor for these kinds of decisions.