False Claims Act Enforcement Expands Beyond Traditional Sectors, Creating Insurance Coverage Challenges

Federal False Claims Act (FCA) enforcement has significantly broadened its scope beyond traditional healthcare and procurement matters, as the U.S. Department of Justice (DOJ) reported record recoveries exceeding $6.8 billion in fiscal year 2025. This expansion has pushed companies to increasingly evaluate insurance options to help manage the substantial costs associated with FCA investigations and settlements.

Over the past year, the government has aggressively pursued FCA investigations in emerging high-risk areas, including diversity, equity, and inclusion (DEI) representations, cybersecurity vulnerabilities in products or services provided to federal agencies, and alleged tariff evasion or customs misstatements.

The record number of new FCA filings signals a robust enforcement pipeline that shows no signs of slowing, creating heightened risk exposure for companies across multiple industries.

Under the False Claims Act (31 USC §§ 3729–3733), the federal government can seek treble damages and civil penalties from entities that knowingly submit false or fraudulent claims for payment. The statute also authorizes private individuals, known as “qui tam relators,” to file suits on behalf of the government against alleged violators.

These qui tam suits are initially filed under seal and remain confidential during government investigation. As incentive, relators can receive up to 30% of any recovery, plus attorney fees and expenses from defendants. Consistently, qui tam suits far outnumber direct government FCA actions.

The DOJ typically initiates investigations through civil investigative demands (CIDs), which can compel document production, interrogatory responses, and testimony. For many companies, receiving a CID is their first indication they’re under investigation.

Beyond federal enforcement, many states and some municipalities have enacted their own FCA statutes, creating multi-jurisdictional enforcement risks, particularly in healthcare where complaints commonly allege both federal and state violations.

Two primary insurance policies may provide coverage for FCA matters: Directors and Officers (D&O) insurance and Errors and Omissions (E&O) insurance, also known as professional liability insurance.

For private companies, D&O policies typically offer broad protection for the company and its leadership, while public company D&O coverage may have more limited entity coverage. E&O insurance generally covers claims arising from professional services, including alleged negligence or errors resulting in financial loss.

Recent legal decisions have clarified when insurance may apply to FCA investigations. A Delaware Superior Court held that a civil investigative demand constituted a covered “claim” under an E&O policy, entitling the insured to defense cost coverage. This aligns with earlier rulings that government demands for information can trigger coverage when policies define “claims” broadly enough to include written demands or investigations.

A recurring dispute in FCA insurance coverage 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 more nuanced views. The U.S. Court of Appeals for the Seventh Circuit determined that FCA settlement payments aren’t necessarily restitution because the FCA provides for civil penalties and compensatory damages rather than purely equitable remedies. The court emphasized that the substance of a payment, not its label in a settlement agreement, determines insurability.

Timing creates another significant challenge for coverage. In qui tam cases, complaints often remain sealed for years before companies become aware of them. Since D&O and E&O policies typically operate on a claims-made basis—covering only claims first made during the policy period—disputes frequently arise about when a claim is “deemed made”: when the sealed complaint is filed or when the policyholder receives actual notice.

For companies facing FCA investigations or litigation, several practical considerations emerge from developing case law:

Early notification to insurers is critical, even when disclosure is constrained by a sealing order. Companies should identify all potentially applicable policies and provide notice as soon as they become aware of FCA-related investigations.

Policy review and coordination across the insurance portfolio is essential, particularly regarding how different policies define “claims” and apply exclusions.

Detailed documentation of communications with insurers and consistent updates during investigations can help preserve coverage and avoid disputes.

As FCA enforcement continues expanding into new areas, insurance coverage disputes will likely persist, particularly regarding settlement payment characterization, claim definitions, and timing issues under claims-made policies. Companies that proactively evaluate coverage, provide timely notice, and coordinate closely with insurers will be better positioned to manage both enforcement risks and associated costs.