As yet another government shutdown looms on the horizon, contractors must again prepare for the ramifications of a shutdown. At present, the President does not look likely to sign a budget bill unless Congress includes significant appropriations for a border wall which also does not appear likely. If no compromise is reached, parts of the government could begin to shut down as early as next week (December 21). While industry has no control over Washington politics, the effects will still be felt nationwide and will probably impact your business as a federal contractor. While not an exhaustive list, a government shutdown can halt your incremental funding stream, delay other payments, preclude you from executing new contracts or modifying existing ones, impose logistical challenges such as closed government facilities or furloughed government employees who are your counterparts on a program, increase your costs (both direct and indirect), and delay or defer the exercise of contract options. So, what can you do to weather the storm? Here are some suggestions for mitigating your risks during a potential shutdown. Continue Reading Five Tips for Surviving Another Potential Government Shutdown
If you bid, but lost out, on a solicitation issued by the Federal Aviation Administration (FAA), you may be thinking of filing a protest to challenge the award. However, FAA procurements are unique in the sense that protests of such procurements are not decided by either the U.S. Government Accountability Office (GAO) or the U.S. Court of Federal Claims, the two venues which decide nearly every other type of protest. The FAA is one of the few federal agencies not subject to the Federal Acquisition Regulation (FAR). While an organization within the Department of Transportation (DOT), which is subject to the FAR and the Department of Transportation Acquisition Regulation (TAR) (48 CFR 12), the FAA, at the direction of Congress, established its own rules and procedures, the Acquisition Management System (AMS) and it is the AMS that governs the FAA’s bid protest regime.
So how do protests of FAA procurements work and what do you need to know about them? Under the AMS, which grants contracting personnel greater discretion and contains fewer prescriptive rules than the FAR, procurement disputes such as bid protests, are decided by the Office of Dispute Resolution for Acquisition (ODRA) under its procedures published at 14 CFR 17. Continue Reading What You Need to Know About Bid Protests Before the Federal Aviation Administration
Every manufacturing contract, including construction contracts, with the government contains a myriad of terms and conditions and other requirements, including the numerous provisions set forth in the Federal Acquisition Regulation (FAR) that are often incorporated expressly or by reference into the contract. Understandably, contractors focus on the contract’s specifications, schedule, terms for payment, and certifications of compliance with various contractual and regulatory requirements. But, while these items are undoubtedly central and must be closely monitored, contractors should also review whether their supply chains are subject to the Defense Priority Allocation System (DPAS) for rated orders. The DPAS is an ordering regime by which the government can direct (or redirect) suppliers to prioritize their delivery of materials and supplies to, and across, various government projects and contracts, even if doing so would disrupt the schedule under another contract, such as your contract. So, how does this system work, what does it mean for you, and what might you be able to do, and should do, in the event you encounter a DPAS-rated order in your supply chain?
Take this not uncommon situation for example. A prudent contractor has entered into a contract with the Corps of Engineers (COE) to build a new runway at Air Force Base Alpha. The contract incorporates the FAR’s contract terms. Being a prudent contractor, materials were timely ordered, delivery dates confirmed, project schedule and sequencing double checked; orderly and efficient construction commences. All is good in the world.
However, two weeks before delivery of materials needed to meet completion in the time specified in the contract, a supplier writes the prudent contractor and says: “Unfortunately, the materials ordered cannot be delivered per the agreed schedule. Materials are being diverted to the Fort Omega construction project. So sorry. We will deliver the materials ordered in three or four months.” Prudent contractor advises the COE of this development, contacts every other supplier of the materials needed, but is unable to secure materials in time to meet the contract milestone.
Prudent contractor comes to learn that the Fort Omega project has been designated with a Defense Priority Allocation System rating. The Fort Omega project has a “DO” rating. This means that the supplier that received the rated orders must “give them preferential treatment as required by this part.” 15 C.F.R. § 700.3
In the meantime, the Contracting Officer on the AFB Alpha project has sent a notice to cure default to prudent contractor due to the lack of materials needed to timely complete the project. The supplier tells prudent contractor that he ordered the materials first, but unfortunately, “Scheduling conflicts with previously accepted lower rated or unrated orders are not sufficient reason for rejection under this section.” 15 C.F.R. § 700.13(b)(1). The supplier explains that rated orders for rated projects are a matter of national security, and therefore, under the law, and the public policy favoring national security, there is nothing supplier can do.
Not knowing where to turn, prudent contractor calls his attorney, who explains that “Although the operation of the DPAS may give rise to excusable delay in an appropriate case, the DPAS regulations require performance of a lower priority contract to be deferred only if ‘required delivery dates [for the higher rated contract] cannot otherwise be met.’” DCX, Inc. v. Perry, 79 F.3d 132, 134 (Fed. Cir. 1996).
Additional information gathering confirms that: supplier is the only person from whom materials can be timely procured for the Omega project; and the dilatory contractor on the Omega project ordered materials three months after prudent contractor, and barely in time to meet the Omega project schedule. Prudent contractor gathers all the information on delivery dates for replacement materials, calculates the costs, calculates a new completion date, and prepares this analysis for the Contracting Officer. Prudent contractor also gently reminds Contracting Officer that, under FAR, contractors shall not be “terminated nor . . . charged with damages” if “the delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor;” which include “(ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government.” 48 C.F.R. 52.249-10(b)(1). Because it was proactive and diligent, prudent contractor and the Contracting Officer are able to agree to a fair extension of time to complete the Alpha project.
This example is not uncommon and provides several, valuable takeaways. When encountering unforeseen impacts due to another project’s DPAS rating, the contractor should determine contingencies quickly, calculate the time and cost impacts, keep records of timely orders of materials, and present the information in a clear and timely manner to the Contracting Officer. By taking reasonable action, the contractor may be able to prevent an unfair, and surprise, default when the events are beyond its control. In addition, to the extent possible, the contractor, in conducting its diligence to bid on the contract, should evaluate the depth of its supply chain so that reasonable alternative suppliers may be identified and engaged in the event the first supplier is unable to provide materials in a timely manner due to a DPAS-rated order.
Today, the SBA issued major proposed rule changes to the HUBZone program. This is the first comprehensive revision to the HUBZone rules since the program’s implementation nearly 20 years ago, and the changes are intended to improve the predictability and stability of the program for participants.
In general, to qualify as a HUBZone firm, the firm must have its principal place of business located in a HUBZone (historically underutilized business zone) and 35% of their employees residing in one or more HUBZones. The advantages of being a certified HUBZone small business are enormous. Not only do HUBZone firms qualify for HUBZone small business set-aside contracts, they also qualify for a 10% price preference against non-small business offerors on unrestricted procurements (FAR 19.1307). The problem, however, is that the HUBZone map regularly changes due to changes in economic data (though Congress recently issued a partial freeze to the map until SBA is able to update the zones following the 2020 decennial census), and in many industries a firm’s ability to maintain a 35% HUBZone-resident workforce is heavily dependent on the location of the contracts it wins.
SBA’s proposed rule changes would make it significantly easier for contractors to maintain their HUBZone status once certified. Among the most significant changes are:
- An individual will continue be treated as a HUBZone resident if that individual worked for the firm and resided in a HUBZone at the time the concern was certified or recertified as a HUBZone small business concern and he or she continues to work for that same firm, even if the area where the individual lives no longer qualifies as a HUBZone or the individual has moved to a nonHUBZone area.
- Certified HUBZone firms would only be required to do annual recertification, rather than immediate recertification at the time of every offer for a HUBZone contract award. A HUBZone small business concern would then represent that it is a certified HUBZone small business concern at the time of each offer, but its eligibility would relate back to the date of its certification or recertification, not to the date of the offer. This would allow certified HUBZone small businesses to remain eligible for future HUBZone contracts for an entire year, without requiring it to demonstrate that it continues to meet all HUBZone eligibility requirements at the time it submits an offer for each additional contract.
Stay tuned for more on these proposed rule changes in the coming weeks and months. Comments to SBA on the proposed rule changes are due Dec. 31.
It is not uncommon for government contractors to have one or more related companies (e.g., parent/subsidiary companies) involved in the industry. One way the government keeps track of such related entities is to utilize Commercial and Government Entity (CAGE) codes. These codes are used for a variety of purposes, including facility clearances. As a recent Government Accountability Office (GAO) decision reminds contractors, CAGE codes are material and play an important role in establishing the precise legal identity of an offeror which, when examining a protest, will not to be taken lightly.
In this particular case, the United States Transportation Command (Agency) issued a request for quotations (RFQ) that required offerors to (among other requirements): (1) identify their CAGE code and (2) have and maintain a valid facilities clearance (FLC) at the secret or higher level. In response to the RFQ, the one offeror (the Protester) timely submitted its offer, identified CAGE code 6YTU0, and indicated it possessed a secret FCL. After several inquiries by the Agency and responses from the Protester, it was discovered the CAGE code the Protester provided belonged to the Protester’s wholly-owned subsidiary. It was the CAGE code assigned to the subsidiary (and not the Protester) that was linked to the secret FCL. Based on this, the Agency advised the Protester it was ineligible for consideration for award. Continue Reading GAO Upholds Agency’s Rejection Of Protestor’s CAGE-Y Proposal
The Ninth Circuit Court of Appeals in the recently issued case of United States ex. rel. Rose v. Stephens Institute (Rose) held that the two-step test of Universal Health Services, Inc. v. United States ex rel. Escobar (Escobar) is mandatory in implied false certification cases brought under the False Claims Act (FCA).
In Escobar, the Supreme Court held that implied certification cases under the FCA can proceed where the defendant makes a claim with specific representations and the defendant’s failure to comply with a material requirement makes those representations false or misleading.
[W]e hold that the implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
However, the question left open in the wake of Escobar was whether proving these two conditions was necessary or merely sufficient to prevail in an implied certification FCA case, an issue on which lower courts have split since Escobar, as previously discussed in this blog.
In Rose, the Ninth Circuit appears to have joined those courts which have held that the Escobar test is a necessary condition which the government or a qui tam relator must meet to prevail in an implied certification case. This is good news for defendants in the Ninth Circuit because the plaintiff must meet a more exacting standard (i.e., show that the defendant made an affirmative statement that is proven to be false or misleading by the defendant’s failure to comply with a material requirement) in order to proceed on an implied certification case.
In Rose, the relators were former admissions representatives for the Academy of Art University in San Francisco. The relators alleged violations of Title IV of the Higher Education Act in that the Academy’s incentive compensation plan improperly violated the Department of Education incentive compensation ban. The relators claimed compliance statements made to the Department constituted FCA violations. The Academy brought a motion for summary judgment in the district court, which was denied.
Following the denial, the Supreme Court issued Escobar. The Academy filed a motion for reconsideration, which was likewise denied. An interlocutory appeal to the Ninth Circuit followed, which included the question of whether Escobar’s two-part test was mandatory in all implied certification cases.
The three-judge panel in Rose held that the Escobar test was indeed mandatory in such actions and thus upheld the central premise of Escobar that an implied false certification theory must comply with at least the two-step test, though the panel noted if the issue came before the court en banc, the full Ninth Circuit might find that the Escobar standards are not necessary in all cases. Thus, the Rose opinion suggests that, if confronted with the issue on a later date, the Ninth Circuit may allow plaintiffs to proceed on an implied certification case without needing to prove the specific two parts of the Escobar test as they may be able to rely on other or broader elements such as those set forth in prior Ninth Circuit decisions interpreting the implied certification theory of FCA liability. However, for the time being, the Rose decision bodes well for defendants and reinforces the point that, although Escobar brought much-needed clarity to implied certification theory cases under the FCA, the issue remains jurisdiction-specific for the time being, which should be a consideration and a reality in any defense strategy.
Customers will frequently want you to complete performance sooner than may be required by the contract. When presented with such a dilemma, contractors face the challenge of keeping the customer happy while performing the work in a manner that will meet specifications and the contractor’s business expectations. To navigate this process effectively, it is important for contractors to have a working knowledge of the circumstances in which an acceleration claim may arise and what to do when such an event does arise in order to manage the project in a smooth and efficient manner that protects the contractor. As this post discusses, while there are different types of acceleration, a common situation encountered by contractors on federal jobs is constructive acceleration. This occurs where, because of an intervening event that creates an excusable delay in the project, a contractor has a justified claim for an extension of time, the contracting officer knows about the contractor’s claim and the circumstances causing the delay, but the contractor is forced to incur additional costs due to the customer’s refusal or failure to grant an extension, thus requiring the contractor to complete the work as originally agreed upon prior to the rise of the delay. Of course, if the customer grants an extension, the contractor is not required to accelerate and, thus, any costs incurred to accelerate the project will be deemed voluntary and not compensable.
The Constructive Acceleration Claim:
Constructive acceleration has its origins as a common law claim—meaning it was developed by the courts/boards of contract appeal, rather than being created by regulations such as the Federal Acquisition Regulation. The doctrine allows a contractor to recover additional compensation when, despite some intervening excusable delay in the project that has arisen through no fault of their own, the contractor is nevertheless required by the customer to accelerate its work by being required to comply with the contract schedule, despite an excusable delay. To prevail on a constructive acceleration claim, the contractor needs to prove four elements: (1) the existence of an excusable delay; (2) knowledge of the contracting officer of the excusable delay; (3) order to accelerate; and (4) the contractor, based on the order to accelerate, accelerated the work and incurred additional costs.
- Existence of an Excusable Delay
In order to recover for a constructive delay, the first thing a contractor must show is that there is an excusable delay—if there is no excusable delay, there can be no constructive acceleration. This first element is arguably the most important, as it goes to the heart of a constructive acceleration claim. There are many factors, even unintended ones, which arise during the course of any project but most are not excusable delays which may give rise to additional compensation if the customer decides to hold the contractor to the original schedule. However, if an excusable delay does arise – typically some act of God, war, embargo or strike — and even if the contract is silent as to the contractor’s entitlement to a time extension, the contractor will be entitled to recover its costs for constructive acceleration if it is shown that the contractor was forced to accelerate to overcome an excusable delay (and the other elements of constructive acceleration are satisfied).
- Contracting Officer’s Knowledge of the Excusable Delay
Second, the contractor must show that the contracting officer had knowledge of the excusable delay. While this second element is frequently thought of as a requirement that the contractor make a timely claim for extension due to an excusable delay, you may have a constructive acceleration claim even where no claim is made to the contracting officer so long as the contracting officer has actual notice of the delay and your actions to address it. However, in order to recover for constructive acceleration absent a formal request for an extension, the contractor must show that (1) the contracting officer has clearly indicated that no time extensions will be granted, and (2) the contracting officer has actual knowledge of the excusable delay.
- Order to Accelerate
Third, the contractor must show that the contracting officer has given some order that could reasonably be construed as a demand to accelerate the work. Typically, this takes the form of the contracting officer either demanding work be completed pursuant to the schedule in the face of a clear excusable delay, or the contracting officer rejecting a request for an extension of time due to an excusable delay and subsequently demanding that the work be completed on schedule. While a direct order is the most common situation leading to a constructive delay, contracting officers have been found to have ordered acceleration in the following circumstances: (1) failing to review and grant an extension (with nothing more, including no direct order to meet the schedule), which took away the contractor’s ability to perform at a normal pace, and (2) delaying granting a time extension where the contractor was forced to modify/accelerate its schedule by the time the time extension was eventually granted.
- Causation and Damages
The final element of constructive acceleration is evidence that the contractor accelerated its work in response to the contracting officer’s order, and that the contractor incurred additional costs as a result. In most cases, particularly cases in which the contractor requested an extension that was denied, it will be fairly obvious if the contractor accelerated the work in response to the contracting officer’s order. In addition to proving causation, the contractor must be able to show that it incurred additional costs in accelerating the work.
Other Notes for Constructive Acceleration:
- A contracting officer is able to cut off liability for constructive acceleration by granting a time extension, even if the contractor was originally forced to accelerate
- Courts have typically refused to award damages for acceleration where there is a concurrent, inexcusable delay by the contractor and the contract allows the government to order acceleration for contractor-caused delays.
While constructive acceleration claims provide contractors with a safeguard against incurring costs due to an excusable delay, there are several milestones, sometimes hurdles, that a contractor must check off or overcome in order to prevail. Accordingly, while there is some flexibility in the standards which the contractor must meet, the safest approach, whenever possible and which should always be carefully documented, for a contractor experiencing an excusable delay is to: (1) make a request for a time extension as soon as possible, and include the facts and circumstances giving rise to the delay and your efforts to date in addressing the matter, regardless of the likelihood that the contracting officer grant an extension, and (2) if the contracting officer does ultimately deny the extension, carefully document that denial as well as the contractor’s acceleration efforts and resultant costs. Performing these steps, and documenting them, will help ensure that there is sufficient evidence that the contracting officer was aware of the excusable delay and evidence of causation and damages.
To help you navigate the rough seas of doing business with the federal government in the Trump administration, Washington PTAC, Pacific Northwest Defense Coalition, AGC of Washington, and the Government Contracts team at Oles Morrison have assembled a group of nationally recognized government contracts professionals for a seminar covering topics relevant to government contractors across all industries.
Session topics include:
- Federal Design-Build Challenges | Doug Oles, Partner, Oles Morrison Rinker & Baker LLP | With a long history in design-bid-build construction, federal agencies have struggled with the design-build project delivery system. This session will highlight some of these key challenges, and how contractors can avoid falling victim.
- DCAA Audit & Investigation Essentials | David Yang, Partner, Oles Morrison Rinker & Baker LLP; Tony Worick, Manager, PricewaterhouseCoopers | The session will cover the types of audits and investigations conducted by the Defense Contract Audit Agency (DCAA), what you should expect during them, best practices for maximizing your position while minimizing risk, and a look at the key DCAA trends from FY2018 as well as what we can expect from DCAA in FY2019.
- Are You Sure That Your Small Business Size Certification Is Accurate? | Dominique Casimir, Partner, Arnold & Porter; Adam Lasky, Partner, Oles Morrison Rinker & Baker LLP | SBA’s complex size and affiliation rules lead many federal contractors to inaccurately certify that they are small, which can lead to FCA liability and debarment. This session will provide a guide to SBA’s Affiliation Rules, plus best practices for managing the accuracy of your size certifications and mitigating/correcting inaccurate certifications.
- Panel: Roadblocks to Commercial Items Contracting | Howard Roth, Of Counsel, Oles Morrison Rinker & Baker LLP; Laurie Davis, Sr. Contract Specialist; Shaun Kennedy, Senior Attorney, Ball Corporation | This session provides private and government sector perspectives on recent changes in commercial item contracting and provides practical tips for making commercial item determinations (i.e., price reasonableness, commerciality, of-a-type, etc.). The panel will also address to what extent the Federal Circuit’s recent decision in Palantir will affect commercial item purchasing.
- Lunch Speaker: Understanding Your Obligations and Potential Compliance Gaps Regarding Bribery, Gratuities, Kickbacks and Other Government Contract Ethics | Paul Bowen, Partner, K&L Gates LLP | Conducting business with the government requires strict compliance with all ethical business practices. This includes avoiding, detecting, and, in some cases, reporting bribery, illegal gratuities, and kickbacks. This session will help you understand the key ethical obligations in government and recognizing compliance gaps in your ethics program.
- Labor Compliance Pitfalls: Obama-Era Challenges and Regulations Remain | Eric Crusius, Partner, Holland & Knight LLP | This session will cover how to spot and comply with various government contracts-specific labor requirements, including the Service Contract Act, Davis-Bacon Act, and Fair Labor Standards Act, plus new regulatory requirements such as mandatory sick leave and minimum wage. In addition, Eric will discuss the Top 10 labor compliance pitfalls in government contracting.
- Navigating Tariffs, Shutdowns and Other Sovereign Acts | James Nagle, Of Counsel, Oles Morrison Rinker & Baker LLP | Acts by the government in its sovereign (public, as opposed to contracting) capacity, such as tariffs, government shutdowns, or new EPA or OSHA rules, can throw a monkey wrench into a contractor’s planned costs and schedule. Learn how to anticipate, plan for and react to such acts, which is indispensable to a contract’s and contractor’s success.
- Keynote: Hot Topics in Procurement Reform | Prof. Steven Schooner, Nash & Cibinic Professor of Government Procurement Law and Co-Director of the Government Procurement Law Program, The George Washington University Law School | Our distinguished keynote speaker will discuss and provide commentary on the hottest topics in federal procurement reform, including the proposed Section 809 Panel reforms, which could change the face of government procurement.
Two Ways to Attend:
- In-person, AGC of Washington (Second-floor Conference Room, 1200 Westlake Avenue North, Seattle, WA 98109). Parking will be validated.
- Live Webinar
- October 25, 2018
- 8:00 a.m. – 3:00 p.m. PST (Breakfast and Lunch included)
- Networking Reception: 3:30 p.m. – 4:30 p.m.
Click HERE for the program flyer and complete schedule.
Click HERE to Register.
Questions? Contact Tiffany Scroggs at 360.464.6041 or via email at firstname.lastname@example.org
So-called “sovereign acts” may soon affect the performance of a wide swath of government contracts by shielding the federal government from the fallout of President Trump’s newest tariffs. The sovereign acts doctrine is rarely discussed, but it can have a profound impact on contract profitability.
While a contractor might normally be granted additional compensation when its performance is hindered by government action, the sovereign acts doctrine protects the government from liability where the impact on a particular contract results from the government’s “public and general acts as a sovereign.” In other words, because the federal government’s legislative and regulatory powers take precedence over fidelity to any particular private contract, the government is not responsible when its higher-order actions happen to disrupt contract performance.
In March 2018, the Trump administration began imposing tariffs on steel (25%) and aluminum (10%) imports. These tariffs have since been expanded to a number of close U.S. trading partners, including the European Union, Canada, and Mexico. On July 6, the Trump administration also set a tariff of 25% on approximately $50 billion in Chinese imports, and has announced an additional 25% tariff on approximately $200 billion in Chinese consumer goods.
The question of whether a particular federal action is “public and general” enough to trigger the doctrine varies from case to case, but there is a substantial possibility that tariffs on imported steel and other building supplies may qualify. This would leave contractors to cover recent increases in materials costs that flow directly from these trade policies.
While these national-scale government actions are certainly the most visible examples of the sovereign acts doctrine, contractors should also be prepared to confront more localized government actions that benefit from the same defense.
Work site access restrictions are a common example of such “local” sovereign acts. For example, in Conner Bros. Const. Co., Inc. v. Geren, the Army and one of its commanders made the operational security decision to exclude construction personnel from a worksite within an Army base in the days following the September 11, 2001 terrorist attacks. This was deemed a sovereign act that precluding recovery for the contractor’s delay damages, though the contractor was allowed additional time to perform.
Similarly, in Garco Const., Inc. v. Secretary of the Army, (which also involved administrative deference issues that we have covered in previous posts), the sovereign acts doctrine protected the Army from liability after the more stringent enforcement of its existing base access policy barred entry for a large number of subcontractor workers.
While it can be difficult to plan for circumstances like these, contractors should keep a close eye on the price risks that they and their subcontractors accept when bidding on federal contracts. If there is a substantial chance that an imminent sovereign act could interfere with performance, contractors would be well-advised to ensure that their bids reflect contingencies that account for this possibility.
To learn more about how the sovereign acts doctrine could intersect with these new tariffs, or for information about the potential impact of other governmentwide disruptions, consider attending our upcoming seminar, “Navigating Federal Government Contracts Northwest 2018.” The seminar/webinar will include a keynote speech by James Nagle specifically addressing the application of the sovereign acts doctrine to government shutdowns and other current or looming political disputes.
Regardless of your industry, companies that have business dealings with the federal government face the persistent risk of False Claims Act (FCA) investigations and lawsuits. The FCA, 31 U.S.C. §§ 3729 – 3733, imposes civil and criminal liability for knowingly making a false or fraudulent claim to the United States for money or property; or to avoid an obligation to pay money (reverse false claim). 31 U.S.C. §§ 3279-3733. Under the FCA, the government may bring its own action or may intervene in the existing qui tam complaint, a private right of action brought by a whistleblower (relator), against an individual or company accused of engaging in fraudulent activities against the government. Contractors face the possibility of treble damages. In addition, the contractor may face civil penalties. 31 U.S.C. 3729(a)(1)(G). In 2018, The maximum per claim penalty is $22,363.
In recent years, FCA claims have been on the rise as the government continues to crack down on fraud, waste, and abuse in order to protect taxpayer dollars. The DOJ reported it obtained over $3.7 billion from FCA cases in FY 2017—making it the eighth straight year the federal government recovered more than $3 billion in FCA cases. This trend does not appear to be changing any time soon.
The uptick in FCA activity has made insurance coverage for FCA contractors an evolving area of law subject to different interpretations by different courts. Accordingly, any risk management program that should include insurance coverage that may be leveraged to cover FCA investigations and claims. To proactively manage these risks, companies should make sure they (1) have appropriate liability insurance in place, given their risk profile; (2) if a FCA claim is asserted against the company, to respond in a manner that does not jeopardize coverage; and (3) carefully consider insurance coverage issues prior to resolving an FCA lawsuit.
Review Your Policy Language
Claims under the FCA primarily implicate three types of liability insurance: (1) directors and officers (D&O) liability insurance; (2) employment practices liability (EPL) insurance; and (3) errors and omissions (E&O) insurance. Although the three types of policies provide different coverages, each commonly covers loss resulting from a claim for a negligent act (as defined in the policy).
As with any insurance matter, the starting point is with the policy itself. How is “claim” defined? How is “loss” defined? How are “professional services” defined? It is important to be aware of how these terms are defined in your policy. The term “claim,” for instance, may not be limited to the filing of the lawsuit—it may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “claim” includes government investigations and informal investigations. The policy’s definitions not only set the parameters for what is covered, but also may affect your notice obligations. It may be beneficial for policyholders to procure insurance policies with a broad definition of “claim,” but policyholders should note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.
Likewise, the definition of “loss” is critical. To maximize potential protection for FCA claims and to better navigate inevitable disputes with the insurance company, the definition should expressly include fines and penalties and any damages multipliers. Similarly, policyholders should avoid definitions of “loss” that exclude “matters uninsurable.” For instance, policies may exclude returned money (restitution) from their definition of “loss” under the policy.
Policyholders should anticipate that insurers may attempt to avoid coverage obligations by asserting exclusions in the policies apply. Be wary of language in your policy for exclusions for fraud or intentional, reckless, or even grossly negligent conduct as well as notice provisions that may later bar your ability to seek coverage against an insurer.
Things to Remember While Negotiating FCA Settlements to Preserve your Coverage Rights
Like most claims, many FCA lawsuits are ultimately resolved by settlement. When drafting a settlement agreement, be cognizant of your insurance policy, including how the conduct is characterized, and whether your settlement needs to include language to allocate between covered and non-covered portions based on the “relative legal exposure” of the covered and non-covered claims (so as to streamline future claims against your insurer). Under this method, the portion of the settlement amount that may be allocated to a non-covered loss is determined by the extent that liability motivated the parties to settle. These considerations will be important in determining how settlements are structured and language is drafted. Nonetheless, the policy language, jurisdiction and public policy will determine to what extent the insurance company can allocate an FCA settlement to a non-insured loss.