Delaware Court Rules False Claims Act Investigations Covered by Claims-Made Liability Policies

A Delaware court has issued a significant ruling that expands coverage for companies facing False Claims Act (FCA) investigations under claims-made liability insurance policies, potentially providing crucial financial protection for businesses navigating government scrutiny.

The Delaware Superior Court’s decision confirms that policyholders can seek coverage for legal costs incurred during FCA investigations from their insurers, even when the investigation begins before the policy period. The ruling addresses a common scenario where investigations often start informally and evolve over time, sometimes spanning multiple insurance policy periods.

At the heart of the case was a dispute between a healthcare provider and its insurer over defense costs related to a federal investigation. The insurer had attempted to deny coverage by arguing that the investigation began before the policy’s effective date. The court rejected this interpretation, finding that the triggering event for coverage was when the formal allegations were made, not when the government first started making inquiries.

“This ruling represents a significant win for policyholders,” said Sarah Johnson, an insurance recovery specialist at Marshall Legal Partners not involved in the case. “Companies often face uncertainty about when exactly an investigation becomes a ‘claim’ for insurance purposes. The Delaware court has provided much-needed clarity on this issue.”

The False Claims Act, originally enacted during the Civil War and substantially strengthened in 1986, allows whistleblowers to file lawsuits on behalf of the government against entities they believe have committed fraud against federal programs. These cases, known as qui tam actions, can result in treble damages and substantial penalties. The legal defense costs alone can reach millions of dollars, making insurance coverage crucial for many businesses.

The healthcare sector has been particularly vulnerable to FCA claims, with the Department of Justice recovering more than $5.6 billion from healthcare fraud settlements and judgments in 2021 alone. Other industries facing significant FCA exposure include defense contractors, financial services companies, and any business that receives federal funding.

The Delaware ruling aligns with a growing trend among courts to interpret claims-made policies more favorably for policyholders. Claims-made policies, unlike occurrence-based policies, provide coverage for claims made during the policy period regardless of when the alleged wrongful act occurred, provided the act happened after the policy’s retroactive date.

“The decision reinforces the importance of carefully reviewing policy language related to claims-made triggers,” noted Michael Becker, an insurance industry analyst. “Insurers may now need to reconsider how they define ‘claims’ and ‘investigations’ in their policies to better manage their exposure.”

For businesses, the ruling highlights the importance of promptly notifying insurers when receiving any government inquiry that could potentially develop into a formal investigation. Companies should also carefully review their directors and officers (D&O) liability policies, errors and omissions (E&O) coverage, and any specialized regulatory investigation coverage to ensure adequate protection.

Industry experts recommend that companies facing government scrutiny assemble a response team that includes both legal counsel and insurance recovery specialists to maximize potential coverage. Documentation of all communications with government agencies becomes critical evidence when seeking coverage under claims-made policies.

The Delaware decision may face appeals, but it represents a significant milestone in insurance coverage law. The ruling could influence courts in other jurisdictions facing similar disputes, potentially creating a more favorable landscape for policyholders nationwide.

Insurance carriers may respond to this development by adjusting premium structures or adding more specific exclusionary language to their policies regarding governmental investigations. Some may also offer enhanced coverage options specifically designed for regulatory and FCA investigations, albeit at higher premiums.

For companies operating in highly regulated industries or those that regularly contract with the federal government, this ruling underscores the importance of robust insurance coverage as part of an overall risk management strategy. The financial protection provided by appropriate insurance can be the difference between weathering an investigation and facing potentially ruinous costs.