• When the Government Comes Knocking, Remember to Review Your D&O Policy
  • September 17, 2013 | Authors: Catherine M. Aiello; Lynda A. Bennett
  • Law Firm: Lowenstein Sandler LLP - Roseland Office
  • No company, director or officer likes it when the government comes knocking with a subpoena, Wells Notice or similar regulatory investigation communication. Such demands can have significant legal ramifications and can be expensive to address. Frequently, when receiving a governmental inquiry, companies, directors and officers are busy marshaling resources to comply and may overlook an important issue: the availability of insurance coverage under “directors and officers” (D&O) liability policies.

    Timely Notice Is Critical

    D&O insurance can be a valuable resource to recoup costs associated with responding to governmental subpoenas and investigations. However, timely notice is crucial in order to reap the benefits of coverage. If an insured waits too long to notify its insurer, it may jeopardize coverage.
    Early notice is critical for two key reasons. First, D&O policies are “claims made” policies that require the claim be made and reported by the insured to the insurer during the policy period. Second, defense costs typically are reimbursed only from the date the claim is tendered to the insurer. Thus, notice should be provided as soon as possible after a “claim” has been made.

    Definition of “Claim” Varies

    It is crucial to understand what qualifies as a “claim” under a D&O policy. Lawsuits qualify as “claims” that are subject to coverage under a company’s insurance policies. However, the availability of coverage for subpoenas and other less formal governmental communications is not as apparent.

    D&O policies usually define the term “claim” broadly to include (1) any written demand for monetary damages or nonmonetary relief; (2) a civil proceeding commenced by service of a complaint or similar pleading; (3) a criminal proceeding commenced by the return of an indictment; and sometimes (4) a formal or informal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal or informal investigative order, or similar document. Thus, subpoenas, Wells Notices and other governmental communications often qualify as “claims”, and the costs associated with responding to the government’s demand may be covered. However, the definition of “claim” varies from policy to policy, so obtaining advice from experienced coverage counsel is essential.

    Policyholders are not alone in trying to determine whether a subpoena or investigatory notice qualifies as a “claim” under their D&O policies. Courts around the country have grappled with the scope of coverage that must be provided for subpoenas and other governmental demands.

    Nature of the Subpoena May Determine Scope of Coverage

    In general, courts carefully scrutinize the circumstances of the subpoena or governmental demand and the specific D&O policy language to define a “claim” and determine whether coverage must be provided. Subpoenas often qualify as D&O claims when the insured is the target of the subpoena and not just a source of information. However, if a subpoena is directed to the company’s “Keeper of Records” and does not indicate that the company or a director or an officer is the target of the investigation, courts have held that there is no claim for purposes of coverage. Therefore, the facts of each case and the specific policy language must be carefully reviewed.

    Courts also have interpreted broadly the term “nonmonetary relief” in a D&O claim definition to encompass a subpoena. The reasoning is that a subpoena is a substantial demand for compliance by a federal agency to produce certain documents, thereby constituting a “claim” against a party. Grand jury investigations and investigations by the U.S. Attorney’s Office have been found to be sufficient to trigger coverage because such actions are viewed as allegations of wrongdoing.

    In summary, companies must be vigilant in evaluating whether D&O insurance coverage is available when they receive a subpoena or other investigatory communication from a governmental authority. Notice should be provided as soon as practicable, and experienced coverage counsel should be engaged early in the process to navigate the nuances of the insurance policy language and communicate with the insurer on coverage issues.