No company, director or officer likes 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.
D&O insurance can be a valuable resource to help recoup costs associated with responding to governmental subpoenas and investigations. However, timely notice is crucial to reap the benefits of coverage. If a company, director or officer waits too long to notify their 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, companies and individual insureds should provide notice as soon as possible after a “claim” has been made.
This leads to the next important issue — understanding what qualifies as a “claim” under a D&O policy. Companies know that lawsuits constitute “claims” that are subject to coverage under their insurance policies. 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 a “claim,” and the costs associated with responding to the government’s demand may be covered. However, it is important to emphasize that the definition of “claim” varies from policy to policy.
Indeed, it is sometimes difficult for insureds to determine whether a subpoena or investigatory notice qualifies as a “claim” under their D&O policies. However, they are not alone. Courts around the country have grappled with the scope of coverage that must be provided for subpoenas and other governmental demands. No New Jersey court has addressed the issue in a reported decision. However, an opinion rendered in Jemmco Partners v. Executive Risk Indemnity on a motion to dismiss provides some insight. No. SOM-L-486-07 (N.J. Sup. Ct., Somerset County Oct. 12, 2007).
There, a hedge fund received subpoenas from a grand jury, the SEC and the Commodities Futures Trading Commission (CFTC), seeking documents related to market timing. When Jemmco’s insurer denied coverage, Jemmco filed suit, and the insurer moved to dismiss the complaint, arguing that the grand jury proceedings and subpoenas were not claims but “merely stepping stones” of potential claims. Jemmco Transcript at 34. Jemmco countered that the D&O policy’s broad definition of “claim” did not exclude subpoenas and therefore entitled it to coverage.
The court decided that the grand jury proceeding met the definition of claim for “a criminal proceeding in a court of law,” and the SEC and CFTC subpoenas were “administrative or regulatory proceedings,” based on an affidavit stating formal investigative orders were issued. Although the court acknowledged that subpoenas were “not the kinds of documents that allege wrongful acts,” the court was not prepared at such an early litigation stage to rule that the policy required a formal accusing document to satisfy the definition of claim. Still, the court reasoned “certainly, a subpoena with a target letter would be sufficient to allege wrongful acts,” and “it may be that there are other circumstances such as some other kind of notice to the insured that its wrongful acts may be the subject of the investigation that would permit coverage.” Adding that it was “premature to interpret the policy,” the court permitted Jemmco to move forward with its case.
Outside of New Jersey, several courts have held that subpoenas qualify as claims when the insured is the target of the subpoena. One court has observed that the “majority” of jurisdictions have adopted the view that the plain meaning of the term “nonmonetary relief” in a D&O claim definition is broad enough to encompass a subpoena. See Agilis Benefit Servs. v. Travelers Cas. & Sur. Co. of Am., No. 5:08-CV-213, 2010 U.S. Dist. LEXIS 144491 *19 (E.D. Texas April 30, 2010). In Agilis, the Eastern District of Texas found the term “nonmonetary relief” to include “a demand to produce documents or appear to testify.” Thus, the court held that an IRS investigation and grand jury subpoena constituted a claim under a D&O policy.
Similarly, in Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461, 463 (8th Cir. 1990), the circuit court held that: “The function of a subpoena is to command a party to produce certain documents and therefore constitutes a ‘claim’ against a party. … Further, the grand jury’s investigation and the questioning by the Assistant United States Attorney amounted, as a practical matter, to an allegation of wrongdoing.” A Maryland federal court found that subpoenas specifically probing an insured’s marketing and credit counseling activities qualified as a claim because the company was a target of the investigation and not just a source of information. Ace Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789, 796-98 (D. Md. 2008). See also Dan Nelson Automotive Group v. Universal Underwriters Group, 2008 U.S. Dist. LEXIS 4987 (S.D. Jan. 15, 2008) (holding an attorney general’s civil investigative demand alleging violations of state statutes qualified as a claim).
In Illinois, a district court reached a similar conclusion regarding a subpoena issued by the Justice Department in Richardson Electronics v. Federal Ins. Co., 120 F.Supp.2d 698 (N.D. Ill. 2000). A civil investigative demand and subpoenas constituted a “claim” because they required the insured to comply with demands for testimony and document production for an ongoing investigation of the company. The court acknowledged the seriousness of such demands and construed “claim” to mean a demand for something due or believed to be due. Four years later, the Illinois court again held that an SEC subpoena was a covered claim under a D&O policy because the subpoena was a “substantial demand for compliance by a federal agency,” and the “nonmonetary relief” sought by the subpoena itself was the production of documents or testimony. Minuteman Int’l. v. Great Am. Ins. Co., 2004 U.S. Dist. LEXIS 4660, *22 (N.D. Ill. Mar. 22, 2004).
However, courts do carefully consider the circumstances of the subpoena or governmental demand. For example, in Center for Blood Research v. Coregis Ins. Co., 305 F.3d 38, 42 (1st Cir. 2002), the First Circuit held that an investigative subpoena from the U.S. attorney did not qualify as a “claim” because the company was not a target of the investigation, and the subpoena was directed to the company’s “Keeper of Records.” Specifically, the court noted there “was no suggestion in the subpoena that the government was seeking anything other than information from the Center.”
Similarly, in New York, a District Court held that investigative subpoenas and search warrants were not “demands for nonmonetary relief” sufficient to state a claim under a D&O policy. Diamond Glass Cos. v. Twin City Fire Ins. Co., 2008 U.S. Dist. LEXIS 86752, *13 (S.D.N.Y. Aug. 18, 2008). The target of a grand jury investigation, the insured received a subpoena addressed to the “custodian of records” to produce documents and testify. The insured sought coverage under its D&O policy which defined a claim as, among other things, a “written demand for monetary damages or nonmonetary relief commenced by the receipt of such demand.” Ruling in favor of the insurer, the court reasoned that the plain and ordinary meaning of “relief” (i.e., “redress or benefits”) did not encompass subpoenas. However, more recently, the Second Circuit held in MBIA v. Federal Ins. Co., 652 F.3d 152, 159-62 (2d Cir. 2011), that a subpoena issued by the New York attorney general constituted a covered claim under a D&O policy that defined claim to include “a formal or informal investigative order or similar document.” Rejecting the insurer’s argument that a subpoena was a “mere discovery device,” the court found the subpoena was at least “a similar document” entitling MBIA to coverage.
Thus, courts carefully scrutinize the specific policy language used to define a “claim,” and the particular circumstances of the communications received by the insured, to determine whether coverage must be provided for subpoenas and other governmental communications. Where an insured is considered the target of a government subpoena or investigation, courts are inclined to grant coverage. If the governmental communication is more general in nature, e.g., simply requesting information from a records custodian, such facts may not be sufficient to trigger coverage. Still, even in those circumstances, notice should be provided to the D&O insurer to preserve coverage in the event the potential claim develops into a covered claim.
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. •