DOJ whistleblower program puts investigation coverage in focus

Companies should review their directors and officers liability insurance policies for entity investigation coverage following the Aug. 1 launch of U.S. Department of Justice’s whistleblower rewards program, experts say.

The substantial financial incentives offered to whistleblowers could lead to more investigations, but D&O policies may not cover or offer only limited coverage for related expenses, they say.

The DOJ program offers financial incentives to whistleblowers who provide “original, non-public, and truthful information,” leading to a successful forfeiture exceeding $1 million. Whistleblowers could also be eligible for up to 30% of the first $100 million in net proceeds forfeited and 5% of the next $100 million to $500 million in net proceeds forfeited, the agency said.

The DOJ designed the program to complement similar rewards plans launched by other agencies, such as the U.S. Securities and Exchange Commission, which established its whistleblower rewards program in 2010 with the passage of the Dodd-Frank Act.

The SEC’s program has successfully obtained tips from whistleblowers, sanctioned companies and disgorged ill-gotten gains. On Aug. 23, the SEC announced awards of more than $99 million to whistleblowers and said that, as of the end of fiscal year 2023, it had awarded nearly $2 billion to roughly 400 whistleblowers.

Before establishing its program, the DOJ encouraged companies to self-report domestic and foreign corruption and health care fraud allegations. The new program is structured to put companies on the clock to self-report to the DOJ within 120 days of receiving an internal whistleblower complaint, said Kevin B. Muhlendorf, a Washington-based securities law partner at Wiley Rein LLP.

If a tip leads to a DOJ investigation, traditional D&O coverage might not respond.

D&O policies typically define “claims” as a written demand or lawsuit and do not cover government investigations into a company’s conduct, said Philadelphia-based Michael Savett, an insurance coverage attorney at Butler Weihmuller Katz Craig LLP.

Although many courts have ruled that subpoenas or civil investigative demands for documents constitute a covered D&O claim, state laws differ on whether they rise to the level of a claim or allege wrongful acts, said Geoffrey B. Fehling, a Boston-based insurance recovery partner at Hunton Andrews Kurth LLP.

Some policies expressly cover so-called “pre-claim inquiries,” which include requests by regulators to provide information, documents, and testimony, but most of the time, that coverage is limited to demands made to insured persons, such as individual directors and officers, not the company, and may also be subject to sublimits or other restrictions, he said.

Investigation coverage for entities, which can be included in D&O policies, is typically more limited than coverage available to individuals and usually only covers formal government proceedings and enforcement, Mr. Fehling said.

Investigation coverage for public companies is often more limited than for private companies because coverage centers around securities claims, which limits the types of claims that can trigger coverage. Conversely, entity coverage for private companies is usually broader, and if an investigation triggers the policy’s insuring agreement, the scope of coverage is often as broad as it would be for more formal actions, Mr. Fehling said.

In response to the rise in formal and informal investigations that don’t give rise to a D&O claim, insurers began offering entity investigation coverage that provides “a belt and suspenders approach” that fills the gaps in traditional D&O coverage,” Mr. Savett said.

Policyholders were previously wary of the cost of entity investigation coverage, but the softening of the D&O market has led to more insurers offering the coverage and more companies purchasing it, said New York-based Adam Furmansky, deputy D&O product leader for the east region in the financial services group at Aon PLC.

Although entity investigation coverage for investigations involving the Foreign Corrupt Practices Act is not universally offered, obtaining the coverage could be valuable for companies, said San Francisco-based Nick Reider, deputy D&O products leader for the west region in the financial services group at Aon.

Policyholders should also attempt to narrow the breadth of “insured v. insured” exclusions in their D&O policies, which can be done through exceptions for whistleblower claims and/or limiting the exclusion to apply only to claims brought by the insured entity, said Chicago-based Seth Lamden, an insurance recovery partner at Blank Rome LLP.