Insurance Coverage Options to Address False Claims Act Crackdown

By David A. Gauntlett*

Introduction

Both the U.S. Customs and Border Protection and the Department of Justice (“DOJ”) have intensified their focus on enforcement of the False Claims Act (“FCA”), particularly with regard to customs compliance. These entities are closely examining how goods are classified, valued, and routed. Even for companies acting in good faith, compliance is not trivial. It can be all too easy to misstep purely by mistake without any illegal intent. This creates serious exposure that warrants careful attention in procuring insurance solutions to mitigate the effects of any violations for importers, logistics providers, and government contractors.

FCA Exposure Usually Tied to Import Practices

U.S. customs law requires importers to accurately report the country of origin, correct classification under the Harmonized Tariff Schedule, and proper valuation of imported goods. While inaccuracies can result in administrative penalties, such as fines or forfeiture of goods under 19 U.S.C. § 1592, the greater risk now lies in potential FCA liability. The FCA imposes treble damages and additional penalties for “knowingly” submitting false customs information.

Earlier this year, the DOJ released its white-collar enforcement strategy, Focus, Fairness, and Efficiency in the Fight Against White-Collar Crime. It prioritizes enforcement against illegal foreign trade practices and customs fraud. The DOJ has elevated these cases within the Criminal Division and expanded its Corporate Whistleblower Awards Pilot Program to incentivize tips leading to asset forfeiture in customs fraud matters. At the Federal Bar Association’s Qui Tam Conference, DOJ officials confirmed that reverse FCA cases—where duties are avoided through false customs declarations—will receive increased attention in 2025.

Reflecting this shift, the DOJ recently filed a complaint against an importer accused of undervaluing goods using fraudulent invoices to reduce duty payments. While whistleblowers have long brought qui tam FCA suits in this area, we expect more direct government enforcement moving forward.

This increased federal scrutiny also aligns with legislative developments. Last year, the House passed the Protecting American Industry from International Trade Crimes Act, which would require the DOJ to create a Trade Fraud Task Force within its Criminal Division. Given the expanding focus on trade enforcement, even unintentional compliance errors may trigger whistleblower claims or regulatory scrutiny. Businesses should assess the potential insurance implications of such risks and take proactive steps to ensure compliance.

Potential Insurance Solutions

Three types of prominent insurance policies can provide coverage for any defense costs, and even perhaps indemnity, arising from FCA claims.

Directors & Officers (“D&O”) policies are usually the first line of defense. These policies will cover any claims against the company's leaders for alleged “wrongful acts,” which is usually broadly defined. An FCA lawsuit or DOJ investigation alleging fraudulent import practices is almost certain to implicate coverage by alleging misstatements or misconduct by the insured individuals within the company. D&O insurance will typically advance defense costs, and many policies treat government subpoenas or investigations as covered “claims.”

Errors & Omissions (“E&O”) policies cover liability arising from the insured's professional services. Their applicability to tariff-related claims depends on the circumstances. As the name suggests, E&O coverage can only help when liability stems from errors in providing services to a client. Any alleged negligence will be covered, and potentially reckless conduct as well,[1] but intentional violations are beyond the scope of these policies.

Representations & Warranties (“R&W”) insurance, commonly used in M&A transactions, can indirectly cover pre-closing tariff and FCA risks. If the target company falsely claimed compliance with customs laws—such as stating that all duties were paid or that there were no material violations—and the buyer later faces an FCA investigation related to pre-closing duty evasion, that misrepresentation may trigger coverage under the R&W policy.

Critical Policy Terms

Insurance coverage for FCA-related investigations or enforcement actions largely hinges on the specific wording of your policies. When assessing coverage, pay close attention to the following key provisions:

Fraud and Dishonesty Exclusions: Most liability policies exclude coverage for losses arising from fraud or intentional misconduct. However, well-drafted policies typically limit this exclusion to instances where fraud is confirmed by a final adjudication. In the absence of such a finding, defense costs are often still covered.

Prior Knowledge Exclusions: Coverage can be denied if the insured was aware of the issues leading to the claim before the policy period began. D&O and R&W policies frequently contain exclusions related to known conditions. To protect future coverage, disclose any existing audits, government inquiries, or internal investigations during the application or renewal process.

Definition of “Claim”: A broad definition of “Claim” is critical to securing coverage for early-stage government actions, such as subpoenas, Civil Investigative Demands, or sealed qui tam complaints. Some policies include these within the definition of a claim, while others require a formal lawsuit or enforcement action. Understanding what triggers coverage ensures timely notice and maximizes protection.

Several Cases Have Confirmed Coverage for FCA Claims

In ACE Am. Ins. Co. v. Guaranteed Rate Inc.,[2] the Delaware Supreme Court upheld coverage for an FCA claim under a D&O policy. The D&O policy contained an exclusion for loss “arising out of ... any Insured's rendering or failure to render professional services.”[3] Insurers add this kind of “dovetailing” exclusion to a D&O policy to exclude claims that are already covered under a professional liability policy. In Guaranteed Rate, the same insurance company issued both types of policies. The insurer had already successfully argued that the professional liability policies did not cover the FCA claims because the “investigation and settlement did not arise out of Guaranteed Rate's professional services.”[4] The insurer then attempted to also argue that the professional services exclusion precluded coverage under the D&O policy.

The Delaware Supreme Court rejected the latter argument. The outcome on such issues can depend on the nature of the FCA claim, the specific insurance policy language and the applicable state's law.[5] Guaranteed Rate is an important reminder that the interplay between coverage grants and exclusions in a company’s suite of insurance policies can be a critical consideration in determining the applicable coverage for an FCA claim.

In Affinity Living Group LLC v. StarStone Specialty Insurance Co.,[6] the Fourth Circuit evaluated potential coverage under an E&O policy. An operator of adult care homes faced an FCA action for submitting Medicaid reimbursement claims for resident services that allegedly were not provided. Its E&O policy covered “damages resulting from a claim arising out of a medical incident,” which was defined to include an “act, error or omission in [the policyholder’s] rendering or failure to render medical professional services [i.e., ‘the health care services or the treatment of a patient’].”[7]

The Fourth Circuit noted that in the context of a coverage grant, “the term ‘arising out of’ . . . must be interpreted broadly to require only some ‘causal connection.’”[8] Accordingly, the FCA claim fell within the scope of coverage because, while the “false-claims-act complaint does not seek damages for rendering or failing to render the personal-care services,” the alleged false billing would not have occurred “but for the failure to provide the services.”[9]

Conclusion

Given the current focus on trade enforcement, companies should proactively evaluate whether their insurance programs are equipped to address potential FCA or customs-related exposures. It is critical to review D&O and related policies for key provisions—such as the definition of “claim,” fraud exclusions, and notice requirements. If there are signs of government interest or inquiry, early consultation with insurance counsel and prompt notice to insurers can be crucial in preserving coverage.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Aloha Petroleum, Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. SCCQ-23-0000515, 2024 WL 4431797, *9–11 (Haw. Oct. 7, 2024) (“The District Court frames the issue as whether reckless conduct can be an ‘accident’ and thus a covered ‘occurrence.’ . . . Reckless conduct – awareness of risk of harm - falls short of practical certainty [and is therefore covered].”)

[2] ACE Am. Ins. Co. v. Guaranteed Rate Inc., 305 A.3d 339 (Del. 2023).

[3] Id. at 342.

[4] Id. at 341.

[5] Compare, e.g., Gallup Inc. v. Greenwich Ins. Co., No. N14C-02-136FWW, 2015 WL 1201518, *11–13 (Del. Super. Ct. Feb. 25, 2015) (holding that a D&O policy's professional services exclusion did not apply to an FCA claim), with HotChalk Inc. v. Scottsdale Ins. Co., 736 F. App'x 646, 648 (9th Cir. (Cal.) 2018) (holding that a D&O policy's professional services exclusion barred coverage for an FCA claim).

[6] Affinity Living Grp. LLC v. StarStone Specialty Ins. Co., 959 F.3d 634 (4th Cir. (N.C.) 2020).

[7] Id. at 640.

[8] Id. at 642.

[9] Id.