On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other things, the statute provides for government assistance programs to businesses affected by the COVID-19 epidemic. Similar to previous statutory “bailout” programs, significant government oversight will track and investigate the use of disbursements under the CARES Act. For example, the Justice Department will oversee disbursements under the CARES Act through its powers under the False Claims Act (FCA).

The FCA prohibits persons from submitting false claims for government funds. The FCA permits both the federal government and individuals (whistleblowers) the right to fight fraud committed against the government. When a whistleblower files an FCA claim on the government’s behalf, known as a qui tam action, the complaint remains under seal pending a prolonged government investigation process, which typically includes intense and expensive discovery and presentations to the Justice Department. During this process, the target of the investigation may not know about the claim, or may be unaware that it is the target of the claim.

If past experience serves as a predictor (as some may remember from the 2008 financial crisis and subsequent government stimulus programs), as disbursements are made under the CARES Act, we are likely to see an uptick in government enforcement activity under the FCA, which is likely to, in turn, result in a considerable amount of claims under D&O insurance policies. Below we provide our thoughts on the coverage issues that insurers and policyholders should consider as such claims are made:

• Does an FCA Subpoena Constitute a “Claim”? In the FCA context, the insured may not receive notice of a claim until after the government concludes its investigation. Or, if the insured has knowledge of the claim, it may not be aware that it is a target of the investigation. Defense costs during the investigation process are likely to be costly. The policy’s definition of “Claim” will provide guidance on whether such investigation costs that are incurred prior to the service of a complaint are covered.
• Is an FCA Award a Covered “Loss”? FCA violations can result in civil or criminal fines and penalties, punitive damages, restitution and disgorgement. The policy’s definition of “Loss” will provide guidance on whether such awards are covered, and the result may be different depending on the applicable law.
• Are Whistleblower Claims Covered? When a whistleblower is an executive of the company, there is a potential that an insured (the executive) is suing another insured (the company). Some insurance policies exclude from coverage such “insured v. insured” lawsuits, while others except FCA whistleblower claims from this exclusion.
• Are FCA Retaliation Claims Related to FCA Whistleblower Claims? Following whistleblower claims, employees could be subject to retaliation, which may result in further claims. Issues associated with such follow-on claims include whether the original whistleblower claim (or qui tam action) and the later retaliation claim are related, which can determine whether or not separate limits of liability are available for such claims. Similarly, the qui tam action (reported in Policy Year 1) could trigger a D&O policy’s prior and pending litigation exclusion, prior knowledge exclusion or prior notice exclusion, such that the retaliation lawsuit (reported in Policy Year 2) is not covered because it is sufficiently related to the earlier qui tam
• Are there Other Applicable Policy Considerations? Depending on the facts of the particular claim, and the wording of the policy at issue, there are a host of other policy provisions to consider, such as conduct exclusions, professional services exclusions, contractual liability exclusions and/or regulatory enforcement exclusions.

These are just some of the issues likely to arise in the coverage context once CARES Act disbursements are made and FCA enforcement activities rise. Defense costs are likely to be significant, because FCA claims tend to require specialized defense firms, which come with a hefty price tag. D&O insurers should brace for an increased wave of claims stemming from CARES Act payments and related investigations. Insurers and policyholders alike should read their policies carefully in light of the particular facts of each claim.

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