Federal fund recipients with the remnants of a diversity, equity, and inclusion (DEI) program should review their directors & officers (D&O) liability insurance policy.

On May 19, the U.S. Department of Justice (DOJ) launched its Civil Rights Fraud Initiative, signaling a major shift in how the federal government will enforce civil rights laws against federal contractors and recipients of federal funds. The DOJ announced it will use the False Claims Act (FCA) — its primary tool against government fraud — to vigorously pursue entities that knowingly violate civil rights laws and falsely certify compliance, with a particular focus on diversity, equity, and inclusion (DEI) programs.

What Does the DOJ’s Initiative Mean for Federal Fund Recipients?

The new initiative represents a coordinated effort between the DOJ’s Civil Rights Division and the Civil Division’s Fraud Section, with support from U.S. Attorney’s Offices nationwide. The DOJ will “aggressively pursue” cases where organizations are alleged to have engaged in “racist preferences, mandates, policies, programs, and activities” — including those under the DEI umbrella — if those actions violate federal civil rights laws. The DOJ also “strongly encourages” whistleblowers to file private party or qui tam lawsuits under the FCA, incentivizing private parties to bring claims and share in any monetary recovery.

The FCA carries severe penalties, including treble damages and significant statutory fines. The DOJ’s memo specifically highlights educational institutions, but the scope extends to any organization receiving federal funds, including nonprofits and corporations.

Why Organizations Need to Review Their D&O Insurance Now

Given this heightened enforcement environment, it is critical for organizations with current or past DEI programs — and any recipient of federal funds — to immediately review their D&O liability insurance policies for coverage. Here is what should be considered:

• Regulatory/Government Claims Exclusions: Does the policy exclude coverage for regulatory or government-initiated claims? Many D&O policies contain such exclusions, which could leave exposure.
• False Claims Act Exclusions: Some policies specifically exclude FCA claims. Confirm whether the policy does and understand the implications.
• Coverage for Investigations and Subpoenas: Government investigations can be costly. Check if the policy covers legal costs for responding to subpoenas, civil investigative demands, and witness interviews. Some policies only respond to claims and proceedings, meaning lawsuits.
• Conduct Exclusions: Policies often exclude coverage for claims involving illegal profit or financial advantage. Determine whether coverage continues until final adjudication of the underlying action or ends at an adverse trial verdict. Having insurance to pay for an appeal and to post an appeal bond can make a tremendous difference.
• Reimbursement Requirements: In some jurisdictions, organizations may have to reimburse the insurer if it is later determined that coverage should not have been provided, especially if a conduct exclusion applies. State law varies on this point, so consult with experienced counsel. The law in some states requires reimbursement even in the absence of a policy provision requiring it under the theory that the policyholder would be unjustly enriched if it were allowed the benefit of a fully funded defense that it was not entitled to receive because of a policy exclusion.
• Adequacy of Policy Limits: FCA litigation, especially when coordinated between federal and state authorities, can be extraordinarily expensive. Assess whether the limits are sufficient for a protracted defense and possible settlement.
• Settlement Structuring: Some jurisdictions, such as Delaware, allow policyholders to structure settlements — even for fraud-based claims — in ways that maximize insurance recovery. Skilled legal counsel can be invaluable here.

Key Takeaways

• The DOJ is now actively targeting DEI programs it views as violating federal civil rights laws, using the FCA as its enforcement mechanism.
• Whistleblower lawsuits are likely to increase, raising the risk of costly litigation and government investigations.
• Reviewing and, if necessary, updating D&O policies is essential to ensure organizations have the protection they need before they face a claim.

The time to act is now. Organizations should consult with an insurance broker and legal counsel to review D&O policies and ensure their organization is prepared for this new enforcement landscape.