False Claims Act (FCA) can be very expensive to defend and resolve, and there can be limitations on relevant insurance coverage. Healthcare, managed care and defense contractor entities have disproportionately borne the brunt of these claims. A recent decision in Florida federal court calls into question the constitutionality of suits brought by individuals pursuant to the FCA.
For entities who receive funds from or contract with the federal government, such entities and their directors, officers and employees, have exposure to qui tam lawsuits under the FCA for misallocation or misappropriation of funds or overcharging or otherwise committing fraud against the government.
Any individual with information about fraud against the government may become a whistleblower (qui tam relator) and bring a qui tam lawsuit. Often, the individual is an employee of the entity, which is accused of committing the fraud, but can also be others such as competitors, contractors or anyone else who has information about the alleged fraud.
Defendants found liable under the FCA may be required to pay as much as three times the government’s losses plus penalties for each fraudulent act. Most successful qui tam cases are resolved through settlement negotiations rather than a court trial, although trials may occur. [1]
After a qui tam case is filed, the government investigates the allegations and determines if it will intervene. If the government intervenes and the case is successful through a settlement or trial, the whistleblower, or “qui tam relator,” is entitled to 15% to 25% of the amounts collected by the government.[2]
If the government decides not to intervene, whistleblowers have the option under the FCA to pursue that qui tam case on their own. If the government declines to intervene in the case and the whistleblower successfully pursues it, the whistleblower’s reward is between 25% and 30% of the amounts collected.[3]
$2.68bn in settlements and judgements from civil cases involving fraud and false claims against the government
While qui tam claims don’t encompass all the FCA claims, qui tam claims/allegations do provide a valuable source of information to the government concerning potential FCA violations that the government might choose to investigate.
The Department of Justice obtained more than $2.68 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending Sept. 30, 2023.[4] This settlement figure was derived from 543 different settlements and judgments.
There was a recent case in the Middle District of Florida in which a federal judge issued a ruling holding that the qui tam provisions of the FCA are unconstitutional. In the lawsuit, a whistleblower (relator) named Clarissa Zafirov accused the defendants of violating the FCA under a theory of fraud on the Medicare program (U.S. ex rel. Zafirov v. Florida Medical Associates, LLC, No. 8:19-CV-01236-KKM-SPF (M.D. Fla. Sept. 30, 2024)). The federal government declined to intervene in the lawsuit, so Zafirov prosecuted the lawsuit on her own.[5]
The defendants in the Zafirov case moved for judgment on the pleadings, arguing the qui tam provisions of the FCA are unconstitutional. The Florida court agreed, holding the process violates the Appointments Clause of Article II of the U.S. Constitution because a relator — here Zafirov — in a non-intervened FCA case is acting as an “officer of the United States” but hasn’t been properly appointed to that role.[6]
The Zafirov decision differs from the decisions of courts, which have previously considered the issue and could be reversed on appeal. Even if the decision is affirmed, it won’t affect the government’s ability to bring claims itself, so it may put pressure on the government to bring more claims itself and rely less on relators.
Entities in many industries are subject to the FCA but the industries most commonly associated with FCA cases are healthcare and defense contractors.
67% of the money was recovered
Of the $2.68 billion recovered in 2023, $1.8 billion or 67% of the money was recovered from healthcare and managed care entities. These healthcare and managed care entities have a heavy reliance on the Medicare and Medicaid programs to fund their businesses; as such, the volume of claims submitted to these programs is extreme. Government payers publish their policies, fee schedules and billing manuals publicly, so it is hard for healthcare and managed entities to claim they didn’t know what could be covered and what was a “false claim.” Healthcare and managed care entities are required to do their due diligence to ensure that they are presenting accurate and appropriate claims to payers through their standard coding and billing practices.
From an insurance standpoint, there are a limited number of insurers who offer some form of dedicated fraud and abuse/government funding insurance for privately held and non-profit healthcare companies. In addition, for non-profit and privately held entities, an experienced broker can have great success in obtaining coverage under a directors and officers liability insurance policy (D&O) for defense costs relating to qui tam lawsuits.
For publicly traded companies, the protection under the D&O policy for the company is typically limited to securities (shareholder) claims as defined in their specific policy. As such, any direct qui tam lawsuits naming the company as a defendant would typically be excluded from coverage. Qui tam lawsuits may lead to a downstream securities (shareholder) claim or a corporate derivative suit, which should be covered by the company’s D&O policy (if it includes entity securities coverage and there are no unusual exclusions added to the policy). For directors and officers (insured persons), in the event they are named as a defendant in a qui tam lawsuit or the downstream securities (shareholder) lawsuit, they should be covered by the company’s D&O policy subject to fraudulent and criminal acts exclusions, which are typically only triggered by final non-appealable adjudications.
If a company is concerned with these risks and the scope of coverage provided under their D&O program, alternative risk financing options may be available through the use of a captive insurance company and reinsurance or other creative options.
If you have any questions or concerns about insurance coverage for qui tam lawsuits, please contact WTW for more information.
WTW hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).