Don’t Try to Deny It: Federal Court Holds FCA Settlement is Covered by Insurance

Background

Guidehouse served as the prime contractor responsible for technology services used in administering New York’s Emergency Rental Assistance Program (“ERAP”). Under Guidehouse’s contract with the State of New York, the online ERAP portal was to undergo cybersecurity testing in its pre-production environment before it was launched to the public, and Guidehouse was required to certify that the system met the contract’s requirements. Within hours of going live, the ERAP portal exposed certain applicants’ personally identifiable information and was shut down.

In February 2023, the U.S. Department of Justice issued a Civil Investigative Demand (“CID”) pursuant to the FCA, focusing on allegations that Guidehouse submitted, or caused the submission of, false claims in connection with Guidehouse’s services in implementing New York’s ERAP. A second CID followed in February 2024, and the DOJ informed Guidehouse that it was considering intervening in a sealed qui tam lawsuit. In May 2024, Guidehouse settled with the United States for $7.6 million plus the relator’s attorney fees (the “FCA Settlement”). Guidehouse did not admit any liability or wrongdoing in the FCA Settlement, which we previously reported on.

CNA’s Coverage Denial

CNA denied coverage for the FCA Settlement under the Technology and Professional Liability coverage in the Enterprise Liability Policy it issued to Guidehouse (the “Policy”). In the ensuing coverage action initiated by Guidehouse, CNA asserted that the “gravamen” of the qui tam lawsuit was that Guidehouse made intentional misrepresentations about its ability to perform under the ERAP contract and knowingly hid the noncompliance from New York State. CNA argued that the FCA Settlement fell within an exception to its Policy’s definition of “Damages” applicable to fines, civil penalties, sanctions, forfeitures, and otherwise uninsurable amounts. CNA further argued that the qui tam lawsuit amounted to allegations of fraudulent, intentional acts and/or a knowing violation of a contract and, therefore, that the Policy’s Deliberate Acts/Commingling or Misappropriation of Funds Exclusion (the “Deliberate Acts Exclusion”) also barred coverage. The Deliberate Acts Exclusion applied to Claims “based upon or arising out of any dishonest, fraudulent, criminal or malicious act or omission, commingling, misappropriation or misuse of funds, intentional wrongdoing or knowing violation of any contract or agreement by or on behalf of an Insured.”

The Decision

Applying Virginia law, the Court held that coverage exists for the entire FCA Settlement under CNA’s Policy.  In particular, it opined that:

• CNA failed to establish that the FCA Settlement constituted a fine, civil penalty, sanction, forfeiture, or any other excluded amount. The Court held that CNA bears the burden of establishing that an exclusion or limitation unambiguously applies to the FCA Settlement. The Court concluded that CNA failed to meet its burden, noting that the FCA Settlement does not allocate the payment amount among any particular forms of relief, nor did it identify any portion of the payment as for an excluded amount. “Instead, [Guidehouse] agreed to pay a single, undifferentiated sum in exchange for the Government’s release of claims arising from the conduct identified in the agreement. This distinction is material and places the [qui tam lawsuit] squarely within the initial Technology and Professional Liability coverage grant.”
• The Deliberate Acts Exclusion did not unambiguously apply. The Court also concluded that the allegations in the qui tam lawsuit did not necessarily establish excluded conduct, and therefore, the Deliberate Acts Exclusion does not apply. The Court explained that, under the Deliberate Acts Exclusion, only facts pertaining to, and knowledge possessed by, an “Executive Officer,” which included Guidehouse’s Chief Information Officer, may be imputed to the insured entity, Guidehouse. The Court concluded that CNA “failed to connect the knowledge imputable to [Guidehouse] to one of the forms of culpable conduct the exclusion actually identified—such as dishonesty, fraud, intentional wrongdoing, or a knowing violation of the ERAP contract.”
• The FCA scienter requirement does not necessarily satisfy the Deliberate Acts Exclusion. Under 31 U.S.C. § 3729(a)(1)(A) and (B), liability is imposed only if a defendant acts “knowingly.” However, the Court explained that under the FCA, a person acts “knowingly” if the person has actual knowledge, acts in deliberate ignorance of the truth or falsity of information, or acts in reckless disregard of the truth or falsity of the information, and no specific intent to defraud is required. “Thus, the relator could have prevailed without establishing intentional fraud or a knowing contractual violation,” and indeed, the qui tam complaint alleged the scienter alternatives in the statutory formulation: “knowingly, or acting with deliberate ignorance and/or reckless disregard of the truth.” The Court held that this “matters because the [Deliberate Acts] Exclusion does not broadly exclude all conduct sufficient to establish False Claims Act liability.” The Court also observed that there was no factfinding in the qui tam lawsuit that Guidehouse had committed any dishonest, fraudulent, criminal or malicious act or omission, or any knowing violation of any contract.

What This Means for Policyholders

• Insurers bear a heavy burden to establish that FCA settlements are entirely excluded from coverage. This decision supports that insurers bear a heavy burden in establishing that the entirety of an FCA settlement payment falls unambiguously within an exclusion to the policy’s definition of “Loss” or “Damages,” particularly where the settlement agreement does not allocate amounts among excluded categories. Policyholders negotiating FCA settlement agreements should be mindful of the ramifications of the language they employ in this regard, especially with respect to any characterization of settlement payment.
• Deliberate act exclusions may not bar coverage for settlements, even where intentional misconduct is alleged. Policyholders should pay close attention to their policy language, especially regarding whose knowledge may be imputed to whom and under what circumstances.