As government agencies pursue civil and criminal matters more frequently and aggressively, many clients have asked whether their Directors & Officers (D&O) insurance will cover the costs to respond to government investigations, including presuit discovery. The efforts, internally and with counsel, may be significant and include an internal investigation, responding to information requests, reviewing and producing numerous categories of documents and electronically stored information in response to subpoenas, and preparing for witness interviews. Most D&O policies cover these costs after a civil lawsuit or criminal indictment is filed. However, coverage is much less certain before that point. To maximize your insurance recovery for government investigations and presuit discovery requires a proper analysis of your D&O insurance coverage and notice obligations.
The coverage analysis requires examining the specific language of your D&O policy, controlling case law, and the arguments that can be mustered in favor of coverage. To begin, some D&O policies expressly cover “pre-claim” or “inquiry” expenses, although such coverage may be limited to a request directed to a specific individual, as opposed to the entity. The policies may also require in the civil law context, a formal notice of investigation, subpoena, or request for an interview and, in the criminal law context, that the individual receive a target letter, Wells notice, or grand jury subpoena. “A ‘formal’ investigation does not mean coercive. It can refer to the investigation being carried out according to established rules and procedures….” USA Gymnastics v. Liberty Ins. Underwriters, Inc., No. 20-1245, 2022 WL 575720, *23 (Feb. 25, 2022) (finding Congressional and United States Olympic & Paralympic Committee investigations were “formal investigations”).
Absent express coverage, the next question turns on how courts in your jurisdiction interpret the D&O policy language and decide whether presuit discovery constitutes a “claim” for a “wrongful act,” where a “claim” is often defined as a demand for “monetary or non-monetary relief.”
D&O insurers argue that under this policy language a presuit investigation demand, like a subpoena or interview request, does not constitute a “claim” unless it is accompanied by an express statement that the government has concluded that the insured person has violated the law and, as a result, committed a “wrongful act.” See, e.g., MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 712 F.App’x 745, 754-55 (10th Cir. 2017) (SEC “Order Directing Private Investigation and Designating Officers to Take Testimony” and related subpoenas were not a “claim” without an allegation of wrongdoing where the order stated that the Commission has not determined whether any person or companies have in any way violated the law); Employers’ Fire Ins. Co. v. ProMedica Health Sys., Inc., 524 F.App’x 241, 249 (6th Cir. 2013) (“Because the FTC may issue CIDs to ‘any person’ for the purpose of obtaining information about potential antitrust violations, the mere receipt of a CID does not indicate that the recipient is accused of antitrust violations”).
Insureds, on the other hand, generally argue that, even without such an accusation, a presuit discovery request constitutes a demand for non-monetary relief. A failure to timely respond would allow the government to ask a court to enforce the subpoena and seek sanctions. A federal court in Illinois adopted this exact reasoning where an insured sought coverage under a D&O policy for the cost to respond to a U.S. Department of Justice subpoena issued in connection with a U.S. Department of Health and Human Services Office of Inspector General investigation:
The subpoena … is a written demand for plaintiffs to appear before government officials and produce specific documents. This is a demand for non-monetary relief.
Astellas US Holding, Inc. v. Starr Indem. & Liab. Co., 2018 WL 2431969, at *4 (N.D. Ill. May 30, 2018). See also, e.g., Patriarch Partners, LLC v. Axis Ins. Co., 2017 WL 4233078, *5 (S.D.N.Y. Sept. 22, 2017) (holding that non-monetary relief includes an SEC subpoena for documents); Minuteman Int’l, Inc. v. Great Am. Ins. Co., 2004 WL 603482, *7 (N.D. Ill. Mar. 22, 2004) (holding that an SEC subpoena constituted a demand for relief because a subpoena is “a substantial demand for compliance by a federal agency with the ability to enforce its demands”).
In other words, coverage analysis, of whether your D&O insurance covers government investigations for presuit discovery, depends on your particular facts, your particular policy language, how courts, in your particular jurisdiction, have interpreted the D&O policy language at issue, and persuasive arguments made in favor of coverage.
The notice analysis may also be nuanced. D&O insurers will perform the same coverage analysis and try to turn it to their benefit. It’s not unusual to see a D&O insurer argue that a presuit subpoena does not constitute a “claim” so as to trigger coverage in one jurisdiction, only to argue that the subpoena does constitute a “claim” for which prompt notice should have been provided in another jurisdiction. The result of late or untimely notice, of course, is forfeiture of coverage. In addition, for those D&O policies that include a duty to defend, many jurisdictions follow the rule that the duty is only triggered after actual notice is received.
An insured does not want to incur months of defense fees only to find out that the fees won’t even be considered for reimbursement until after proper notice of the “claim” is provided to the insurer. Finally, the notice analysis is especially important at the time of renewal. The insured’s failure to give notice of its receipt of presuit discovery to its existing D&O insurer may result in a forfeiture of coverage later after a lawsuit or indictment is actually filed. The new D&O insurer will argue that the “claim” is not covered because it arose before its D&O policy came into existence. The former D&O insurer will also argue that the “claim” is not covered because the insured failed to provide it a “notice of circumstances” that could eventually give rise to a “claim.” Analyzing the notice issues can be just as complex as the coverage analysis.
A good time to address whether a D&O policy provides coverage for presuit discovery requests for government investigations and the notice obligations is at the renewal of the policy. However, it is critically important to address your coverage and notice obligations as soon as you receive a presuit discovery request so that you do not unintentionally forfeit coverage.