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Double-check existing policies for whistleblower coverage

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The increasing number of whistleblower lawsuits raises questions of suitable insurance coverage, particularly when the suits allege fraud. Reed Smith L.L.P. partners Luke E. Debevec and Amber S. Finch and associate Miranda A. Jannuzzi discuss how standard commercial insurance coverages can come into play in these cases.

Whistleblower lawsuits under the False Claims Act, also known as qui tam actions, have become more common in recent years. This is particularly so in heavily regulated industries and those in which the government routinely pays or reimburses costs, such as health care, pharmaceuticals, finance, construction and defense. Companies defending themselves against government investigations and FCA actions often have the insurance coverage they need — but frequently overlook it.

Many companies may assume that FCA and similar claims are not covered because they are often based on allegations of fraud, which is excluded under many standard form insurance policies. Further, state statutory exclusions may preclude coverage for such claims. Nevertheless, coverage may be available at least for the significant costs of defending against these claims or, in some cases, their settlement or judgment. This coverage can be found in a variety of common policies purchased by businesses.

Employment practices liability coverage

FCA suits frequently include a claim of retaliation by a whistleblowing employee seeking to recover a portion of the government's damages. A whistleblower may allege she was terminated or subject to other adverse action after reporting her employer's violation. Or an employee might bring a separate lawsuit related to the government's FCA complaint. These claims can be covered by an employment practices liability policy, which covers losses from claims stemming from wrongful employment practices.

Last year, pharmaceutical company Eisai Inc. won defense costs under its EPL policy in a case in New Jersey federal court, Eisai Inc. v. Zurich American Insurance Co.

The government targeted Eisai's sales practices for certain pharmaceuticals and reimbursements for alleged off-label uses, while a related termination suit was brought by an Eisai employee in state court.

In subsequent litigation, the court ruled that the insurer had a duty to defend Eisai in both lawsuits, noting they were intertwined, and required the insurer to pay Eisai's costs in both.

Other jurisdictions also recognize that an insurer that covers only a portion of an interrelated claim fails to provide its policyholder with a complete defense.

Errors and omissions coverage

Errors and omissions coverage may also respond to FCA claims and government investigations. It covers the wrongful acts of a policyholder in its performance of specified business services.

While E&O policies usually exclude losses resulting from fraudulent conduct or intentional wrongdoing, coverage for defense costs and resolution of FCA claims may exist if the alleged conduct falls short of that; if the fraud or intentional conduct is proven at trial, by legal admission or by some other specified means; or if some other negligence of the insured is alleged.

There may also be coverage if the policyholder can show the claim arises out of the adequacy of the services provided — for example, a billing dispute rather than fraudulent billing.

In a recent case, U.S. Bank National Association v. Indian Harbor Insurance Co., a Minnesota federal court denied the insurers' motion concerning coverage for a bank's settlement of actions arising from allegedly excessive overdraft fees.

The insurers insisted the settlement was in the nature of restitution, which they claimed was legally uninsurable, similar to payments to the government in FCA cases.

The court disagreed, ruling that coverage for restitution is not prohibited.

It added that restitution resulting from a settlement doesn't preclude coverage, a ruling that has the potential for broad-based application in insurance recovery.

Directors and officers coverage

Directors and officers liability insurance can also provide broad coverage for FCA claims or government investigations.

D&O insurance protects directors and officers from personal liability and frequently covers claims against the company.

Under D&O policies, a covered “claim” may include civil, criminal, regulatory and administrative investigations. This can be beneficial in the FCA context, where a company can incur substantial costs merely responding to inquiries during an investigation.

In Community Health Center of Buffalo Inc. v. RSUI Indemnity Co., the New York federal court recently ruled that a D&O insurer must defend a community health center and its directors and officers against an FCA complaint.

Commercial general liability coverage

Companies should not overlook their commercial general liability insurance as a potential source for recovery. These policies cover a variety of claims and circumstances, including suits seeking damages for bodily injury, property damage or personal and advertising injury — for example, those caused by offenses such as false arrest, detention or imprisonment, malicious prosecution, wrongful eviction, wrongful entry, libel, slander, invasion of privacy, misappropriation of advertising ideas, or copyright infringement — resulting from an accident. These grants can be far broader in effect than they initially appear.

This year, the 4th U.S. Circuit Court of Appeals upheld a ruling requiring a CGL insurer to defend a pharmaceutical company facing an FCA complaint for its alleged role in a “pill mill” operation. The court ruled in Liberty Mutual Fire Insurance Co. v. JMR Smith Corp. that allegations of the company's “accidental” or “negligent” statutory violations were enough to demonstrate the potential for coverage.

Other policies, insured status

Aside from coverage written specifically for reimbursement of costs and settlements arising from government investigations, other policies and even contracts with third parties can be effective against claims. It is not difficult to imagine claims arising from government investigations triggering coverage under commercial crime policies, employee fidelity policies or cyber liability policies. Where third parties are involved — if the FCA action or governmental investigation names a vendor — companies should also consider whether they have agreements with those third parties requiring “additional insured” status. If additional insured status is provided to the company, there may be significant rights to claim coverage from the third party's insurer.

Once a government investigation is underway or an FCA suit is initiated, the company should consider potential coverage under every policy that may be triggered, including any notice obligations such as notifying the insurer of a claim or potential loss and providing copies of legal papers.

Companies might also consider assessing and confirming the availability of coverage for FCA claims before facing one. Many policies can be written to add coverage for government investigations and claims for return of funds or billing errors and to soften any exclusions for fraud, restitution or illegal profits. Alternatively, a specialty policy covering government investigations or related defense costs could be considered.

Luke E. Debevec and Amber S. Finch are partners and Miranda A. Jannuzzi is an associate in the Insurance Recovery Group in the Philadelphia and Los Angeles offices of Reed Smith L.L.P. Contact Mr. Debevec at 215-241-1213 or ldebevec@reedsmith.com; Ms. Finch at 213-457-8046 or afinch@reedsmith.com; and Ms. Jannuzzi at 215-241-1212 or mjannuzzi@reedsmith.com.