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Insurance coverage for fines and penalties for False Claims Act

On Behalf of | Jan 2, 2018 | False Claims Act

Companies in New York routinely purchase directors’ and officers’ liability insurance to limit costs if someone’s mistake or purposeful action triggers a lawsuit against the company. Litigation regarding securities or shareholder derivatives represents the primary concern of those buying D&O policies, but federal government contractors might also get into trouble under the False Claims Act.

This act emerged during the Civil War era, and it creates liability for contractors that defraud the government. Modern reforms to the law have transformed it into a legal tool for whistleblowers, such as employees and shareholders, to sue companies engaged in fraud against the government. FCA litigation has become more prevalent, and companies sometimes look to their D&O policies to cover some of the settlement costs.

Insurers frequently take the view that coverage does not pertain to FCA claims. Their policies exclude restitution and disgorgement from the definition of loss. Restitution and disgorgement, however, do not necessarily describe the costs of an FCA settlement. Courts have repeatedly ruled that the FCA specifically calls for civil penalties and damages, not restitution.

Although insurers have an interest in limiting payouts, an organization involved in litigation regarding the False Claims Act should not necessarily accept an insurance company’s interpretation of the situation. An attorney familiar with managing insurance company disputes could evaluate the policy and provide guidance about the potential of making a successful insurance claim. Legal representation could also inform a company officer about defense strategies in regards to a lawsuit alleging fraud or misconduct. A lawyer could communicate the company’s position during pretrial negotiations or a trial. A legal opinion could enable a person to make informed decisions throughout the process of responding to a lawsuit and filing an insurance claim.