Insurance Coverage Considerations for False Claims Act Investigations and Settlements

False Claims Act Enforcement Expands Beyond Traditional Sectors, Insurance Coverage Questions Rise

Federal False Claims Act (FCA) investigations and enforcement actions have expanded significantly beyond traditional healthcare and government procurement areas over the past year, according to recent reports. The Department of Justice is now actively pursuing cases involving diversity, equity, and inclusion (DEI) representations, cybersecurity vulnerabilities in products sold to federal agencies, and alleged tariff evasion.

The DOJ recently reported record FCA recoveries exceeding $6.8 billion in fiscal year 2025, along with an unprecedented number of new case filings, signaling a robust enforcement pipeline. This expansion has prompted companies to increasingly evaluate whether their insurance coverage might help offset the costs of FCA investigations and settlements.

The False Claims Act enables the federal government to seek treble damages and civil penalties from entities that knowingly submit false claims for payment. The law also allows private individuals, known as “qui tam relators,” to file suits on behalf of the government against alleged violators. These whistleblowers can receive up to 30% of any recovery, plus attorney fees and expenses from defendants.

Qui tam suits are initially filed under seal and remain confidential during government investigation until unsealed by the court. Notably, these private actions consistently outnumber government-initiated FCA cases each year, creating a significant source of enforcement activity.

For many companies, the first indication they are under FCA investigation comes when served with a civil investigative demand (CID), which can compel document production, interrogatory responses, and testimony. This investigative phase often triggers substantial legal and operational costs.

“Companies are increasingly finding themselves facing FCA exposure in areas they hadn’t anticipated,” said Jane Reynolds, a regulatory compliance attorney at Sullivan & Cromwell. “The expansion into cybersecurity and DEI-related representations means virtually any government contractor could become a target.”

Beyond federal enforcement, many states and some municipalities have enacted their own FCA laws modeled after the federal statute. State enforcement actions have increased substantially in recent years, creating additional complexity for companies operating across multiple jurisdictions.

When FCA investigations arise, two primary insurance policies may provide coverage: Directors and Officers (D&O) insurance and Errors and Omissions (E&O) insurance, also known as professional liability coverage.

For private companies, D&O policies typically provide broad protection for both the company and its leadership. Public company D&O coverage also protects executives, though entity coverage may be limited primarily to securities claims. E&O insurance generally covers claims arising from professional services, protecting against allegations of negligence or errors resulting in financial loss.

Recent court decisions have offered guidance on coverage availability. A Delaware Superior Court held that a CID constituted a covered “claim” under an E&O policy, entitling the insured to defense cost coverage. This aligns with other decisions finding that investigative demands may qualify as claims alleging wrongful acts, potentially extending coverage to pre-litigation stages.

“The definition of what constitutes a ‘claim’ under these policies is critical,” explained Michael Johnson, insurance recovery specialist at Covington & Burling. “Policies that define claims broadly to include written demands for non-monetary relief or investigations may provide earlier coverage in the FCA process.”

A persistent issue in FCA insurance disputes involves whether settlement payments constitute uninsurable restitution or disgorgement. Insurers frequently argue such payments represent the return of ill-gotten gains and are therefore not insurable as a matter of public policy.

Courts have taken a more nuanced view. The Seventh Circuit Court of Appeals held that FCA settlement payments are not necessarily restitution because the statute provides for civil penalties and compensatory damages rather than purely equitable remedies. The court emphasized that the substance of the payment, not its label in a settlement agreement, determines insurability.

Timing presents another challenge in FCA cases, particularly with qui tam actions that may remain sealed for years before companies become aware of them. Since D&O and E&O policies typically cover claims first made during the policy period, disputes often arise regarding when a claim is “deemed made” – when the sealed complaint is filed or when the policyholder receives notice.

Industry experts recommend several practical steps for companies facing potential FCA exposure:

Provide early notice to insurers when FCA issues first arise, even at the investigation stage. Courts have found that delayed notice can jeopardize coverage.

Review policies carefully to understand how “claims” are defined and how exclusions might apply across the insurance program.

Maintain detailed documentation of all communications with insurers during investigations and settlement discussions.

Include insurers in settlement discussions, as policies often require consent or impose conditions on recoverable amounts.

Regularly assess whether insurance programs align with evolving regulatory exposure, particularly as enforcement priorities shift.

As FCA enforcement continues to expand into new areas, insurance coverage will remain an important component in managing financial exposure. Companies that proactively evaluate their coverage options and coordinate closely with insurers will be better positioned to navigate both enforcement risks and associated costs in this increasingly complex regulatory environment.