D&O COVERAGE FOR INVESTIGATIONS
Now you see it; now you don’t
[O]ne may think a court is “incorrect,” but the
court is not wrong unless and until its ruling is overturned.
By Joseph S. Harrington, CPCU
It’s an awkward moment in an agent’s or broker’s career. You convinced a reluctant client to purchase a policy the client was not sure it needed, only to learn later that a key coverage was not triggered when it mattered most.
Showtime came, and the coverage was a no-show. Not good.
In recent years, commercial lines producers have seen a growing number and range of enterprises acquire management liability insurance, better known as “directors and officers” (D&O) insurance.
As the “D&O” tag suggests, the line was developed to protect leaders of major organizations from claims by shareholders for losses due to the fault of executives or board members. Over time, smaller enterprises, including privately held family firms, have seen fit to purchase D&O insurance to provide defense and indemnity coverage to individuals invested with critical oversight and decision-making authority.
Among the attractions of D&O policies had been, at least until recently, growing acceptance by courts that D&O defense cost coverage could be tapped to defray the costs of responding to regulatory and criminal investigations. For example, the global law firm Orrick (now Orrick, Herrington & Sutcliffe) wrote in 2014 that “the recognition by many courts that a subpoena is a ‘claim’ under D&O policies opens the door for potential recovery in a variety of circumstances … policyholders should take heart that the general trend is toward a broad construction of D&O coverage.”[i]
‘Claim’ and ‘wrongful act’
When it comes to applying D&O defense coverage to investigations, the central question is whether a subpoena or some other interrogatory constitutes a “claim” for a “wrongful act” as each term is defined under the policy. Orrick’s 2014 commentary reflected prevailing views at the time in the wake of a widely publicized ruling involving a scandal in the Syracuse University men’s basketball program.
In that case, which involved coverage for costs of responding to grand jury subpoenas, the insurance policy in question defined “claim” to include a “written demand for monetary, non-monetary or injunctive relief” or “a civil, criminal, administrative, regulatory or arbitration proceeding for monetary or non-monetary relief …”[ii]
The court held that the subpoenas fell under that definition, and rejected the insurer’s argument that the subpoenas were merely “discovery devices.” The offenses being alleged, failure to prevent sexual abuse, clearly qualified as “wrongful acts.”
The ruling was seen by many as tipping the balance in favor of insureds seeking D&O coverage for costs arising from investigations.
Things change, of course
But just when producers might think they had a green light to promote that coverage, the tide may have turned.
In a 2020 case, a federal court in Kentucky upheld a denial of coverage for responding to a federal subpoena because the definition of a claim applied in such cases only if the insured was identified in writing as the potential subject of a proceeding.[iii]
About a year later, a U.S. court in Connecticut ruled that a D&O insurer was not obligated to advance defense costs coverage for an insured’s response to a grand jury subpoena. A comment on the case stated that the court “incorrectly” concluded that a government subpoena was not a covered claim under the policy at issue, which included common wording stating that “the Insurer’s consent (to requests for defense expenditures) shall not be unreasonably withheld.”[iv]
Well, one may think a court is “incorrect,” but the court is not wrong unless and until its ruling is overturned.
Roll forward to August 2023, and we see a U.S. appeals court based in Richmond, Virginia, affirm a ruling that an insured was not entitled to coverage for costs incurred in relation to a government search warrant. The court ruled that neither the warrant nor letters to the target’s partner advising him of the investigation, were requests for relief, monetary or non-monetary, and thus did not meet the policy definition of claim.[v]
In the wake of this apparent turn of events, D&O insureds are still well-advised to see if their defense costs coverage extends to investigations. But for agents and brokers, they need to be very cautious abou
[i] Orrick, “D&O Coverage For Subpoena Response Costs: An Emerging Consensus?,” Mondaq, April 3, 2014; accessed at https://www.mondaq.com/unitedstates/insurance-laws-and-products/304434/do-coverage-for-subpoena-response-costs-an-emerging-consensus
[ii] Syracuse University v. National Union Fire Insurance Co., 975 N.Y.S.2d 370, 40 Misc. 3d 1205(A) (N.Y. Sup. Ct. 2013); accessed at https://law.justia.com/cases/new-york/other-courts/2013/2013-ny-slip-op-51041-u.html
[iii] See Aronberg Goldgehn, “Insurance Coverage Update – Investigative Subpoena Not a D&O Claim,” Aug. 18, 2020; accessed at https://www.agdglaw.com/insurance-coverage-update-investigative-subpoena-not-a-do-claim
[iv] See Michael Levine Geoffrey Fehling and Joseph Niczky, “Subpoena Defense Cost Ruling Gets Insurance Law Wrong,” Oct. 14, 2021; accessed at https://www.huntonak.com/images/content/7/9/v4/79200/subpoena-defense-cost-ruling-gets-insurance-law-wrong.pdf
[v] Brown Goldstein Levy LLP v. Federal Ins. Co., 2023 WL 3513693 (4th Cir. May 18, 2023); accessed at https://www.executivesummaryblog.com/assets/htmldocuments/Brown-Goldstein-Levy-v-Federal-Ins-Co-Public.pdf
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.