Insurance Coverage Considerations for False Claims Act Investigations and Settlements

Over the last year, beyond traditional healthcare and federal procurement matters, the government has pursued federal False Claims Act (FCA) investigations and enforcement across high-risk areas, including diversity, equity, and inclusion (DEI)-related representations, cybersecurity vulnerabilities in products or services provided to federal agencies, and alleged tariff evasion or customs misstatements. The US Department of Justice (DOJ) recently reported record FCA recoveries exceeding $6.8 billion in FY 2025 and a record number of new filings, underscoring a robust enforcement pipeline. As enforcement expands, companies are increasingly assessing whether insurance coverage may help defray the costs of FCA investigations and settlements.

KEY TAKEAWAYS

• FCA enforcement is expanding into additional high-scrutiny areas, increasing exposure beyond traditional sectors.
• Directors and officers (D&O) and errors and omissions (E&O) policies may provide coverage for both FCA investigations and settlements, depending on policy terms.
• Early notice to insurers is critical, including at the investigation stage when issues first arise.
• Coverage outcomes often turn on how policies define a “claim” and apply exclusions across the insurance program.
• Disputes over settlement characterization and timing can significantly impact the availability of coverage.

FCA BASICS

The False Claims Act, 31 USC §§ 3729–3733, enables the federal government to seek and potentially recover treble damages and civil penalties from companies and individuals who knowingly submit false or fraudulent claims for payment to the United States government.

The FCA also authorizes private individuals, referred to as “qui tam relators,” to bring suits on behalf of the government against businesses and individuals for alleged violations. The statute mandates that qui tam suits be filed under seal and that they remain sealed pending a government investigation and unsealing by the court. The statute incentivizes qui tam relators to bring suit by authorizing them to receive up to a 30% share of the government’s recovery—whether by settlement or judgment—as well as attorney fees and expenses directly from the defendant. Year after year, the number of new FCA qui tam suits far outpaces the number of affirmative FCA suits initiated by the government.   

When investigating potential FCA violations, the statute authorizes the DOJ to serve civil investigative demands (CIDs), which can compel document production, interrogatory responses, and interview testimony. Service of a CID is often the first indication to a company that it is the subject of an FCA investigation.

In addition to liability for false claims, the FCA includes a retaliation provision that creates a private right of action for employees who allege adverse employment actions for conduct in furtherance of an FCA action. These claims can be brought alongside qui tam actions and provide for remedies including double back pay, reinstatement, and attorney’s fees. FCA retaliation actions also can be brought independent of any qui tam action, in which case the suit is not filed under seal and the government plays no role.

Many states, as well as some municipalities and territories, have enacted their own FCA statutes modeled on the federal law. State FCA enforcement, including by qui tam relators, has increased substantially in recent years, adding further complexity and exposure for companies operating across jurisdictions. In many cases, particularly in the healthcare sector, FCA complaints allege both federal and state claims.

INSURANCE COVERAGE FOR FCA INVESTIGATIONS AND SETTLEMENTS: POLICY TYPES

Depending on the nature of the claim, the insured’s business, and specific policy terms, several lines of insurance may provide coverage for FCA investigations or settlements, most notably D&O insurance and E&O or professional liability insurance.

• D&O insurance: For private entities, D&O coverage typically affords broad protection for the company and its directors and officers. Public company D&O coverage also protects directors and officers, but entity coverage may be narrower and often limited to securities claims.
• E&O insurance: Also referred to as professional liability insurance, E&O coverage generally applies to claims arising out of the insured’s professional services. It can protect a company against claims of negligence, errors, or omissions that result in financial loss.

Courts have found coverage under both types of policies in the FCA context, but outcomes are highly dependent on policy language and the specific facts of the underlying claim.

RECENT DEVELOPMENTS AND JUDICIAL GUIDANCE ON FCA INSURANCE COVERAGE

Coverage for FCA Investigations

Because qui tam complaints are filed under seal, companies frequently first learn of a potential FCA matter through a CID. Responding to a CID can involve significant legal and operational costs, prompting companies to seek insurance coverage for those expenses.

Recent case law confirms that such costs may be covered, depending on policy language. In a Delaware Superior Court decision, the court held that a CID constituted a covered “claim” under an E&O policy, entitling the insured to defense cost coverage incurred in responding to the demand.

This conclusion aligns with earlier decisions finding that a CID issued by a state attorney general may qualify as a claim alleging a wrongful act. These decisions suggest that, where policies define “claim” broadly to include written demands for nonmonetary relief or investigations, coverage may extend to pre-litigation investigative stages.

Coverage for FCA Settlements: Restitution, Disgorgement, and Compensatory Damages

A recurring issue in FCA insurance coverage disputes is whether settlement payments constitute uninsurable restitution or disgorgement. Insurers often argue that 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 approach. The US Court of Appeals for the Seventh Circuit held that FCA settlement payments are not necessarily restitution or disgorgement because the FCA provides for civil penalties and compensatory damages, rather than purely equitable remedies. The court emphasized that the substance of the payment, rather than its label in a settlement agreement, governs insurability.

Similarly, a Delaware court found coverage for a settlement involving disgorgement claims under a management liability policy where the matter was resolved prior to a final adjudication. These decisions indicate that insurers may face challenges in broadly characterizing FCA settlements as uninsurable.

Timing and Policy Periods: The Impact of Sealed Qui Tam Complaints

In FCA qui tam matters, the action often remains under seal—sometimes for years—before the policyholder becomes aware of the claim. Because D&O and E&O policies are typically written on a claims-made basis, covering claims first made during the policy period, this timing can create disputes over which policy applies.

Issues frequently arise regarding whether a claim is deemed “made” when the sealed complaint is filed or when the policyholder receives notice, either through a CID, a government inquiry, or service of the complaint after unsealing by the court. Insurers may also invoke “pending and prior litigation” exclusions to deny coverage.

Courts have reached differing conclusions on these issues, and outcomes depend heavily on policy language and factual circumstances. These timing considerations underscore the importance of careful policy review and early engagement with insurers.

IMPLICATIONS AND PRACTICAL CONSIDERATIONS

The developing body of case law on insurance coverage for FCA-related costs offers several practical considerations for companies facing FCA investigations or litigation.

• Early notice remains critical: Companies should promptly identify all potentially applicable policies, including D&O and E&O policies, and provide notice to insurers as soon as they become aware of an FCA-related investigation or lawsuit. Even where the scope of disclosure is constrained by a sealing order, companies should provide notice within those limits.
• Policy review and coordination are essential: Companies should analyze the interplay between coverage grants, definitions of “claim,” and exclusions across their insurance portfolio. Particular attention should be paid to how different policies may respond to investigations, defense costs, and settlements.
• Documentation and communication should be structured and consistent: Maintaining detailed records of communications with insurers and providing periodic updates during investigations and settlement discussions can help preserve coverage and avoid disputes.
• Settlement engagement should include insurers: Insurers should be kept informed of settlement negotiations, as policy provisions may require consent or impose conditions on recoverable amounts.
• Ongoing policy evaluation should reflect evolving risk: Given the expansion of FCA enforcement, companies should regularly assess whether their insurance programs align with their risk profile and regulatory exposure.

LOOKING AHEAD

FCA enforcement continues to expand in both traditional and emerging areas, supported by sustained government focus, increased “whistleblower” and qui tam relator activity, and evolving legal theories. As enforcement priorities shift and new areas of risk emerge, insurance coverage will remain an important component of managing financial exposure associated with FCA investigations and litigation.

At the same time, coverage disputes are likely to continue, particularly with respect to the characterization of settlement payments, the definition of a “claim,” and the timing of claims under claims-made policies. Companies that proactively evaluate their insurance coverage, provide timely notice, and coordinate closely with insurers will be better positioned to manage both enforcement risk and associated costs.

Uncertainty remains regarding how courts will continue to address these issues, particularly as FCA enforcement evolves into new areas and policy language adapts. Companies should monitor developments closely and consider how changes in enforcement priorities may affect both liability exposure and insurance recovery strategies.