August 13, 2021

D&O Insurance: Coverage for Covid-19 Investigations? It’s Complicated

Earlier this year, the DOJ announced the formation of a “Covid-19 Fraud Enforcement Task Force.” The task force is a joint effort between DOJ & other governmental agencies, and Attorney General Garland promises that it “will use every available federal tool—including criminal, civil, and administrative actions—to combat and prevent Covid-19 related fraud.”

This Woodruff Sawyer blog says that the task force is likely to result in a full-court press targeting potential fraud by recipients of government funds in pandemic-related programs. That likely means that many companies are going to be subjected to probes by the DOJ or other agencies looking for potential violations of the False Claims Act (FCA). These investigations may be disruptive, but at least you can count on your D&O policy to pick up the tab, right?  Well, as this excerpt from the blog explains, the answer is complicated:

One area of frustration for many companies will be the lack of response from a D&O insurance policy for governmental investigations of corporate entities. While some D&O insurance policies may provide limited coverage for the governmental investigation of a corporate entity, this is increasingly unusual. As a result, very large legal fees for these investigations are likely to fall on the corporation.

D&O insurance policies, on the other hand, may respond to defend individuals who are the target of government enforcement actions. However, this coverage is typically only available after the government has made it very clear whom they are pursuing, something that often happens quite late in an investigation process.

Having said that, some polices provide limited coverage for “pre-claim inquiries.” This means insurance coverage for legal counsel for individuals asked to respond to government subpoenas. The cost of document production for documents under the control of the company, however, is typically not covered by D&O insurance.

If there is an FCA investigation that, when disclosed, causes your company’s stock price fall, you can typically expect to be able to rely on your D&O insurance. A modern D&O insurance policy usually covers a securities claim or a breach-of-fiduciary-duty suit related to disclosure concerning the government investigating the company under the FCA. However, the insurance would not cover any settlements with the government. This is because Side C of the D&O insurance policy only covers securities claims. An FCA claim is not a securities claim.

The blog also points out that most D&O policies have an exclusion for claims involving intentional fraud, and that fines and penalties are typically excluded from coverage. Even if coverage is potentially available, the blog provides a reminder that government agencies often demand that companies and individuals forgo any insurance or rights to indemnification when settling with the government.

John Jenkins