Whether a whistleblower’s claim against a defendant is covered by insurance depends on many factors, most significant being language contained within the insured’s policy and the facts in the underlying case. Many insurers have provided coverage for whistleblower actions brought under the False Claims Act. Similarly, there are many instances where insurers deny coverage for such claims.

As recently reported by the media, the insurer for Marinello Schools of Beauty paid $8.6 million to the United States to resolve a civil action brought under the False Claims Act. The action against Marinello was originally brought by six former employees who alleged the school helped students fraudulently obtain high school diplomas in order to secure student aid. In addition to the school’s insurer paying the United States government, the insurer also paid a total of $2.5 million to the whistleblowers.

The federal government’s focus on recoveries under the False Claims Act continues to grow. As more companies are forced to deal with liability under the Act, these companies are increasingly turning to their insurers for coverage. There are several different policies that can come in to play for False Claims Act litigation. Commercial General Liability (CGL) policies provide broad coverage for several types of claims including a company’s operations and claims causing personal injury. While these policies may exclude intentional acts, whistleblower claims do not always involve intentional conduct. Other potential sources of coverage for FCA litigation include policies covering directors and officers, employment or criminal acts.

Although coverage was provided for the whistleblower claims against Marinello School of Beauty, there are many instances where insurers seek to exclude coverage for such claims. Insurers may try to exclude coverage using a form of the “prior and pending” exclusion or the “prior knowledge” exclusion. Both exclusions, as their names suggest, involve circumstances where prior events are similar to the underlying action, providing a basis to exclude coverage. Whistleblower litigation may also trigger the “insured vs. insured” exclusion under a D&O policy if the insurer argues that an employee, as whistleblower, is bringing a claim against another employee of the insured employer.

As False Claims Act litigation continues to grow, companies will want to manage against such risks by obtaining coverage for these types of claims. Likewise, insurers will seek to continue limiting their exposure to such risks by enforcing exclusions and other conditions that will attempt to eliminate coverage for whistleblower claims. The Marinello School settlement proves that insurers can and will cover a False Claims Act suit in certain circumstances. The idea defendants lack coverage for whistleblower claims is simply incorrect.

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Jason Cornell is an attorney who represents whistleblowers with the law firm Clark Fountain LaVista Prather Keen & Littky-Rubin. Clark Fountain represents plaintiffs in various matters throughout the United States. If you have questions regarding the issues addressed in this or other posts, you can reach Jason at jcornell@clarkfountain.com.