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.
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Next Up: PPP Investigations, Enforcement Actions, and Criminal Proceedings?
One of the features of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) is the Paycheck Protection Program (PPP), which is intended to make governmental funds available in the form forgivable loans so that small businesses can keep employees on their payroll. The CARES Act was passed in a rush and the PPP funds were dispersed in a hurry, so it is hardly a surprise that some problems might emerge. The U.S. Department of Justice has already said that as a result of a preliminary inquiry, the agency has already found possible fraud among the businesses seeking PPP funds. As discussed below, the possibility of further PPP investigative, regulatory, and enforcement actions raises a number of questions.
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Cybersecurity Whistleblower Claim under the False Claims Act Settled
In addition to all of the other risks, liabilities and exposures arising from cybersecurity concerns, you can now add the possibility of a whistleblower action for cybersecurity fraud. According to a July 31, 2019 press release from counsel for the whistleblower involved (here), Cisco Systems has agreed to an $8.6 million settlement in what the press release claims is the “first cybersecurity whistleblower case ever successfully litigated under the False Claims Act.” Cisco has agreed to pay the amount to settle allegations that the company knowingly sold vulnerable and defective video surveillance software to federal, state, and local government agencies, exposing the systems to unauthorized access. As discussed below, this development even further expands the range of concerns companies must take into account when assessing their cybersecurity exposures. An August 12, 2019 memo from the Jones Day law firm about the settlement and its implications can be found here.
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Late Notice Precludes Coverage for False Claims Act Settlement
When most people think of liability insurance, they think about the insurer’s payment obligations. But policyholders have obligations under liability insurance policies, too. Among the most important policyholder obligation is the requirement to provide timely notice of claim. The failure to provide timely notice can entirely preclude coverage, as is illustrated in a ruling in a recent coverage dispute arising out of an underlying False Claims Act claim. As discussed below, there were a number of circumstances involved in the underlying claim that the policyholder argued excused or at least explained its late provision of notice. However, the court rejected these arguments and held the late notice was not excused and that coverage was precluded. The February 12, 2019 order in the case by Central District of California Judge Stephen V. Wilson can be found here.
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DOJ Targets Private Equity Firm for Portfolio Company’s Alleged Improper Kickbacks
In an unusual and potentially significant move, the U.S. Department of Justice has named as one of the defendants in a False Claims Act lawsuit a private equity firm whose portfolio company the DOJ alleges engaged in an illegal health care-related kickback scheme. As the Jones Day law firm noted in a February 27, 2018 client memo about the DOJ’s action, the inclusion of a PE firm as a defendant in this lawsuit “may indicate a sea change in terms of who the DOJ is willing to pursue in False Claims Act changes” and “could signal the DOJ’s willingness to seek to pierce the corporate veil and hold private equity sponsors accountable for the noncompliance of their portfolio companies in the health care industry.” The DOJ’s February 23, 2018 press release about the lawsuit can be found here. The DOJ’s complaint in intervention in the lawsuit can be found here.
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D&O Insurance: Regulatory Exclusion Precludes Coverage for Relator’s Qui Tam Action
As 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…
Management Liability Insurance: If a Qui Tam Action is a Claim, When is it “First Made”?
The federal False Claims Act imposes liability on those who defraud the government. The law also allows third-parties to bring so-called 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…