00;00;00;00 - 00;00;25;02
Jonathan Porter
Welcome to another episode of Husch Blackwell’s False Claims Act Insights podcast. I’m your host, Jonathan Porter. Today, we’re tackling a question I get all the time from executives. Can insurance actually cover False Claims Act investigations and settlements? Most people assume the answer is no, especially when fraud is alleged. Insurers love to say, you know, we don’t cover fraud and FCA is fraud.
00;00;25;02 - 00;00;57;08
Jonathan Porter
And so case closed. But a recent federal court decision just turned that conventional wisdom on its head. A company called Guidehouse got a $7.6 million FCA settlement coverage, despite fraud allegations, and the court explained exactly why the insurer had to pay. And so today, we’re going to unpack that case and give you the playbook. What policy language matters, what mistakes to avoid, and what you need to do Monday morning to protect your company.
00;00;57;10 - 00;01;14;28
Jonathan Porter
Joining me to talk about insurance coverage for FCA costs is my law partner, Lorinda Holloway. Lorinda, you’ve been on like 2 or 3 episodes before. And so our guests know you very well. And so I’m not going to do the whole reintroduction except the last time you were on Lorinda, you said, you know, we should do a podcast episode on insurance coverage.
00;01;15;00 - 00;01;30;02
Jonathan Porter
And so here we go. You came up with a good idea and therefore volunteered to be on this episode. So, Lorinda, you’re stuck today talking about insurance coverage, but seriously. Lorinda, thanks for coming on once again to explore this important topic for our guests.
00;01;30;04 - 00;01;42;13
Lorinda Holloway
Oh, I’m happy to be here. And insurance coverage is not like the most shiny, bright object. But, trust me, when you’re in the throes of a government investigation, it becomes super interesting and super important.
00;01;42;13 - 00;01;51;02
Jonathan Porter
Yeah. Totally agree. So, Lorinda, let’s start with the basics. What types of insurance might actually cover FCA investigations and settlements?
00;01;51;04 - 00;02;14;26
Lorinda Holloway
Yeah, at a high level there’s really three policy types that you want to be on the lookout for. In short form. It’s a D&O policy, an E&O policy and a management or enterprise liability policies. So just heading back to the top there. So D&O policy is director and officers insurance. That kind of policy is like the first line of defense for most companies.
00;02;15;02 - 00;02;41;09
Lorinda Holloway
If it’s a private company, a policy is really going to have sort of broad entity coverage. If it’s a public company, D&O coverage is usually a lot narrower and often just focused on securities exposure. The next policy, the E&O, or errors and omissions or professional liability policy, that tends to cover claims for professional services. It tends to cover both investigations and settlements.
00;02;41;09 - 00;03;08;08
Lorinda Holloway
That’s sort of typical. And then finally, that third policy that you want to be on the lookout for is a management or enterprise liability policy that often bundles multiple coverages together and often includes cyber liability. They may have particular like privacy regulation investigation coverages as well. So it’s those three that you want to like first look to. And the takeaway here is, you know your insurance policies aren’t just for when things go wrong.
00;03;08;09 - 00;03;15;04
Lorinda Holloway
They really are your risk management tools. And you should have a good understanding of them really before you need them.
00;03;15;07 - 00;03;35;09
Jonathan Porter
Thanks Lorinda, that’s helpful background. There’s a bunch of costs in False Claims Act investigations. You’ve got legal fees that your lawyers we appreciate being paid for our legal services. So you’ve got the legal fees. You eventually may settle with the government as well. And so there’s a bunch of different costs that we should think about. What costs are we talking about when it comes to insurance coverage?
00;03;35;09 - 00;03;36;28
Jonathan Porter
What can actually be covered?
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Lorinda Holloway
Really two types of cost can be covered. The first is your defense costs, your legal fees, expert witness fees, costs related to document review. Those kind of costs are easier to get an insurer to cover under a policy. The second kind of costs are harder to get the insurer to cover, and that is costs that are the actual money that you may end up paying the government in a settlement.
00;04;03;14 - 00;04;21;27
Lorinda Holloway
And again, it’s harder to get insurance carriers to say that those kind of costs are actually covered. And really, the key point here is that an insurer is more likely to pay your defense costs than they are your settlement. But for sure, if they’re not going to pay your defense cost, they’re definitely not going to buy yourself my costs.
00;04;22;04 - 00;04;39;17
Jonathan Porter
Yeah. Thanks, Lorinda, I appreciate that. So I mentioned in the open about this Guidehouse case, I think it’s an important case, a good case for us to know about. And so Lorinda, if you don’t mind, just tell us the Guidehouse story. What happened to this case and how did Guidehouse end up getting coverage for all their FCA costs and settlement?
00;04;39;23 - 00;05;06;26
Lorinda Holloway
Guidehouse is a major government contractor. In this particular instance, they had a contract to administer New York’s Covid rental assistance program, the ERAP. And under that program, it was a federally funded program to help people basically pay rent during the pandemic. And there was an incident. So in June of 2021, New York launched their online program in a portal and Guidehouse
00;05;06;26 - 00;05;31;04
Lorinda Holloway
had the contract to do this work. Well, 12 hours later, the state had to shut the entire portal down because applicants personal information, their names or addresses, their income data was all exposed on the internet. So it was one of those yikes moments, right? So then an investigation unfolded. Within less than a year, a qui tam complaint had been filed under seal. Guidehouse
00;05;31;04 - 00;05;56;21
Lorinda Holloway
didn’t know that that had existed. Interestingly, the relator was called Elevation 33, LLC, and it was formed by a former Guidehouse employee, and that relator filed suit in federal court in New York. Within less than another year, DOJ served the first the CID on Guidehouse, and this was really Guidehouse’s first understanding that anything was wrong.
00;05;56;23 - 00;06;23;05
Lorinda Holloway
They immediately notified their insurer, which is a critical move we’re going to be talking about. They hired a couple of law firms. They started responding to document requests. Then again, about another year later, DOJ served a second CID and this one asked for a lot more stuff and a lot more specificity about their cybersecurity practices. And at that point in time, DOJ revealed that there is a qui tam on file. Guidehouse
00;06;23;05 - 00;06;48;10
Lorinda Holloway
learned the complaint had been on file for like a couple of years by that point, and in the complaint, the relator claimed that Guidehouse was using like, hopelessly outdated software from a subcontractor, that they knew the software lacked basic security features. They hid it from New York, that they made false certificates about their compliance with contract requirements.
00;06;48;13 - 00;07;22;14
Lorinda Holloway
And they specifically alleged that the chief information officer learned of these deficiencies, but that the company certified compliance anyway. So the theory was under the False Claims Act that Guidehouse had knowingly submitted false claims for federal payments. In the end, Guidehouse settled for $7.6 million, paid the relator’s fees of about 50 grand, and the critical language in the settlement agreement was that there was neither an admission of liability by Guidehouse nor concession by the US, that its claims were not well-founded.
00;07;22;14 - 00;07;47;07
Lorinda Holloway
That kind of language is common, but the government did intervene in order to effectuate that settlement. So I think for purposes of our discussion today, here comes the insurance dispute. And actually, importantly, I think it’s good to understand that as soon as Guidehouse really understood what it was in for, it filed a declaratory judgment action to make sure that it would have coverage or to see if it could have coverage.
00;07;47;10 - 00;08;13;11
Lorinda Holloway
So they filed a declaratory judgment action and Guidehouse start coverage from continental or CNA. They wanted their defense costs for responding to both sides. They wanted their defense costs for everything they incurred during the investigation and for settlement negotiations. And the kicker they wanted that $7.6 million settlement that they negotiated to be covered. Continental denied coverage, they said.
00;08;13;11 - 00;08;36;01
Lorinda Holloway
But this is fraud. The fraud exclusion applies. They said this is an uninsurable penalty that is included here. And even if it had been covered, you got a $5 million deductible. Well, like I said, Guidehouse sued for coverage A federal court in Virginia ruled for Guidehouse. This is one of those moments where like, I wish I had been Guidehouse’s lawyer, right.
00;08;36;08 - 00;09;10;17
Lorinda Holloway
This is a significant win. The court said the insurer must pay the settlement minus the $5 million retention, had to pay all defense costs, had to pay the CID response costs and remember, there were two CID. And can you just even imagine how relieved Guidehouse was? Again, this was a significant win. And the key takeaway here is really that the CID is often the first time that a company learns that it’s under investigation, and that’s exactly why that is the point in time you need to notify your insurer.
00;09;10;20 - 00;09;27;21
Lorinda Holloway
And I tell clients all the time, I’m sure you do as well, Jonathan, you need to notify your carrier early and often when you have a legal event like a CID. They have to respond to you. They have to tell you whether they’re going to cover the claim or not, or at least your defense costs. And we’re going to get into that.
00;09;27;24 - 00;09;49;21
Jonathan Porter
Thanks Lorinda. That’s great background on the case. It sounds complicated. Glad it worked out the way it did. Now, I think what we should tell our listeners real quick before we go to the next question is, I think a lot of this really does depend on what your policy says. And so if you’re sitting here listening right now and you say, boy, I would like coverage one day if I get investigated, I’d like for legal fees to be covered.
00;09;49;23 - 00;10;05;04
Jonathan Porter
You’re going to want to sit down with a lawyer or broker, someone who is going to be able to walk through the exact language in your policy and tell you if you’ve got the kind of coverage that would cover FCA fees and costs and settlements and the like. So, I mean, we’re not going to get into the language here.
00;10;05;06 - 00;10;25;21
Jonathan Porter
I certainly am not qualified to host that type of a podcast. But what I am interested in, Lorinda, is why didn’t the fraud exclusion kill coverage? A lot of people know that if you commit fraud, there’s no coverage for that. So why didn’t that happen here? Why wasn’t insurance able to say, well, this isn’t covered because this was fraud.
00;10;25;24 - 00;10;27;02
Jonathan Porter
Explain that to us.
00;10;27;04 - 00;10;59;18
Lorinda Holloway
Yeah. Great question. And the answer is pretty simple. And that’s because as a technical matter is a real matter of the False Claims Act. Its definition in it’s element of knowledge, it doesn’t actually require fraud. In other words, knowing is defined under the False Claims Act as actual knowledge, deliberate indifference, or something as low as reckless disregard. And that part of the definition really matters here, because it means you can win an FCA case, the relator,
00;10;59;18 - 00;11;29;02
Lorinda Holloway
the government can win an FCA case just by proving reckless disregard and reckless disregard is not intentional fraud. So it’s kind of like nice try insurance carrier. That fraud exclusion just isn’t going to apply if in the pleadings the allegation is that at least there was reckless disregard, in submission of a claim, etc.. So the insurance fraud exclusion just doesn’t apply to all FCA cases.
00;11;29;05 - 00;11;56;06
Lorinda Holloway
And keep in mind and this is really important, it’s pretty basic black letter for insurance coverage law is that if even one theory or claim in a case is covered under an insurance policy, the insurer has to defend you, doesn’t mean they would necessarily have to indemnify you, but they do have to defend you. So in short, just because a government or a relator alleges False Claims Act violations, that doesn’t automatically trigger a fraud exclusion.
00;11;56;06 - 00;11;59;04
Lorinda Holloway
And that’s really what happened in the Guidehouse case.
00;11;59;06 - 00;12;22;11
Jonathan Porter
Thanks, Lorinda. And you’re bringing up things that I’m sure our listeners right now are sitting here listening, saying, okay, but I’ve listened to Lorinda on past episodes and other guests talk about how the FCA is not sort of an all purpose anti-fraud statutes for people who intentionally and knowingly commit fraud. But you’re exactly right. It’s the definition of knowledge within the FCA statute itself that is really important.
00;12;22;11 - 00;12;39;28
Jonathan Porter
And that’s why you’ve got to have lawyers who understand this is because reckless disregard is a really important concept, is the way that the government and relator are able to loop things into the False Claims Act, but it’s also why the fraud exclusion doesn’t kill coverage. So Lorinda, thanks for explaining that to us. So let’s wrap up here.
00;12;40;05 - 00;12;52;03
Jonathan Porter
What should executives take away from this Guidehouse? It’s a pretty important thing. Coverage for False Claims Act investigations and settlements. Like what’s the big takeaway for executives?
00;12;52;05 - 00;13;15;18
Lorinda Holloway
Yeah I would say let the Guidehouse case be your guiding light okay when it comes to insurance coverage. So in short the takeaway is insurance can in some cases cover FCA cases, both your defense and potentially what you end up having to pay or what you pay in a settlement. Even with fraud allegations because of the issue we just discussed.
00;13;15;20 - 00;13;41;03
Lorinda Holloway
But you’ve got to be proactive. So right now, like this week, as soon as you’re hearing this podcast, like send the email to whoever you need to. But do these things, call your insurance policies and check for three key provisions. Look and see what it says about a final adjudication requirement. Look and see what it says about executive officers only imputation of knowledge.
00;13;41;09 - 00;14;04;11
Lorinda Holloway
Look and see what it says about multiplied awards language. And if you don’t have those kind of provisions, you’re probably out of luck, but get with coverage counsel. Get with your broker, take a look at those provisions and see what you’ve got. Talk to your broker about when your renewal time is coming up. Ask specifically about those three provisions.
00;14;04;11 - 00;14;26;25
Lorinda Holloway
And again, use Guidehouse not just as your guiding light, but also your leverage. Tell them like, hey, this Guidehouse, a federal court case, just said these policies, if you have these kind of provisions can cover this kind of exposure. Don’t wait. Insurers, the insurance industry is always watching and they’re going to start tightening terms in response to the Guidehouse case.
00;14;26;28 - 00;14;46;09
Lorinda Holloway
Of course, be careful if you’re in the midst of settling a False Claim Act case, be sure not to admit any kind of knowing or intentional conduct. A lump sum kind of payment is better than a breakdown of where the payments are going to go, or what they’re exactly for. Settlement language can directly affect your coverage. Again, just be careful.
00;14;46;09 - 00;15;01;25
Lorinda Holloway
Work with your lawyer to make sure you’re not stepping on your coverage toes, so to speak. But remember, you want to have settlement without admission of liability. Certainly, you would never want an adjudication, and you want to make sure that your coverage, if you have it, is preserved.
00;15;02;01 - 00;15;23;07
Jonathan Porter
All great points, Lorinda. And unfortunately for those who are under investigation in the District of Massachusetts, where they make you admit to knowing liability, that’s going to have big insurance ramifications. And so if you happen to be under investigation there, you need to think about this issue well in advance, because it’s a really big deal what the District of Massachusetts has people do.
00;15;23;10 - 00;15;29;18
Lorinda Holloway
Okay, well that’s rough. And thank you for enlightening me on that particular point. That’s a rough moment in Massachusetts for sure.
00;15;29;21 - 00;15;52;22
Jonathan Porter
Yes. And to my knowledge, they’ve not backed away from that policy. So here we are. Lorinda, why don’t you close us out by connecting us? We’ve talked a lot about technical insurance coverage, things in this episode loop this back to the big False Claims Act picture, because I think this is a moment where the conversation we’re having today really does matter, because the FCA is still a really big deal.
00;15;52;22 - 00;15;59;15
Jonathan Porter
So close us out by connecting this to the big picture. Why does this discussion, this Guidehouse case, why does this matter right now?
00;15;59;21 - 00;16;28;08
Lorinda Holloway
Yeah, Jonathan, as you’ve been talking about on this podcast, I mean, FCA enforcement is absolutely exploding. There’s been 6.8 billion in recoveries recently expanding into cybersecurity. The AI based FCA claims that’s a real lightning rod of an area right now. The Guidehouse case proves that coverage is possible, but again, insurers are going to respond and tighten the reins and tighten up those policies.
00;16;28;08 - 00;16;50;09
Lorinda Holloway
So jump on it. You have an opportunity right now potentially. So take a look at your policies. The window to lock in favorable provisions it’s closing I would say in the next 6, 12 months we’re probably looking at the carriers really being able to get on top of this Guidehouse based challenge for them. So bottom line, check your policies, negotiate at renewal.
00;16;50;14 - 00;17;10;06
Lorinda Holloway
And even if you’re ever facing an investigation, of course you always want to approach your settlement terms very carefully and negotiate those, footnote if you’re in Massachusetts, may have some moral challenges there. But again, use the Guidehouse case as your guiding light. It’s a roadmap, but you got to have the right language in your policy.
00;17;10;06 - 00;17;33;04
Jonathan Porter
Thanks, Lorinda. All great points. I just want to thank you for coming on the podcast. This is a tremendously important issue to a lot of people who are under federal investigation. A lot of people don’t understand how expensive it is to be investigated, to produce documents to the government, to sit executives down under pressing testimony. It’s a really expensive thing, and a lot of people may think that they’re covered and they’re not.
00;17;33;04 - 00;17;37;01
Jonathan Porter
So, Lorinda, thanks for taking the time to educate our listeners about this. We really do appreciate you.
00;17;37;09 - 00;17;39;22
Lorinda Holloway
Always a pleasure Jonathan.
00;17;39;22 - 00;17;53;28
Jonathan Porter
To close, we’re going to continue to bring you the cutting edge False Claims Act, things like the Guidehouse case. And so however you are listening to us, feel free to subscribe so that you can listen to us some more. We continue to post these on all of the big outlets, so we’d love for you to continue to listen to us.
00;17;53;28 - 00;17;59;29
Jonathan Porter
But to our listeners, we appreciate you and we’ll see you next time.