<b><i>Practice Tip:</i></b>Government Investigations and Proceedings

An area of significant concern for most companies is an investigation by a government regulator, and the subsequent administrative proceeding. Not only is there the possibility of fines and penalties, but the defense costs incurred in defending against such actions typically far exceed the actual penalty imposed. As a result, companies should plan ahead by obtaining insurance that will insulate their bottom line from government investigations and administrative proceedings.

Insurance Pitfalls

In procuring such insurance, however, insureds should understand the potential pitfalls in the coverages offered by the insurers. One of the significant, disputed areas is what constitutes a “claim” under the insurance policies. Insurers have recently contended that a “claim” only arises once there is a formal investigation commenced by a government agency. However, most government investigations typically begin with the issuance of a subpoena or warrant, not through a formal order of investigation. Accordingly, insurers typically dispute coverage, but courts have recently trended toward providing coverage upon receipt of a subpoena or warrant.

For example, in Protection Strategies, Inc. v. Starr Indemnity and Liability Co., the United States District Court for the Eastern District of Virginia had to determine whether a search and seizure warrant and subpoena, and a letter from a United States Attorney's office noting that the insured was being investigated for purposes of civil liability, were sufficient to trigger coverage under a policy intended to insulate the insured from government inquiries. In holding that the insurer was obligated to reimburse the insured for any defense costs incurred, the court noted that:

Starr's policy uses a broad definition of Claim, which includes any “written demand for monetary, non-monetary, or injunctive relief made against an Insured” (Part 1) and any “judicial, administrative, or regulatory proceeding, whether civil or criminal, for monetary, non-monetary or injunctive relief commenced against an Insured ' by (i) service of a complaint or similar pleading; (ii) return of an indictment, information, or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges” (Part 2).

See No. 1:13-CV-00763 (E.D. Va. Sept. 10, 2013).

Thus, the court concluded that “[t]he search warrant and subpoena fall within this broad definition as both written demands for non-monetary relief and as judicial proceedings commenced by service of a complaint or similar pleading.” Id.

Moreover, in Syracuse University v. National Union Fire Insurance. Co. of Pittsburgh, PA, a New York trial court faced a similar issue. There, the insured received “six subpoenas in connection with state and federal investigations: three grand jury subpoenas duces tecum from the United State's Attorney's Office and three grand jury subpoenas duces tecum from the Onondaga County District Attorney's Office.” No. 2012EF63, 2013 WL 3357812, at *1 (N.Y. Sup. Ct. Mar. 7, 2013). The insurer disputed coverage, contending that the costs “in responding to the investigation subpoenas were not covered under the policy.” Id. at *2.

The court rejected the insurer's position, holding that subpoenas issued to the non-profit plaintiff constituted a claim because they were both “written demand[s] ' for non-monetary relief” and proceedings commenced by the “return of an indictment, information, or a similar document.” Id. at *3-4; see also Dan Nelson Auto. Group v. Univ. Underwriters Group , No. CIV 05-4044, 2008 WL 170084, at *5 (D.S.D. Jan. 15, 2008) (“Civil Investigative Demand and Notice of Intent to Proceed” documents were “claims”). In so ruling, the court relied on the Second Circuit's opinion in MBIA, Inc. v. Federal Insurance Co., 652 F3d 152, 160 (2d Cir.2011), which similarly rejected an insurer's position that a subpoena does not constitute a “claim”:

We reject the insurers' crabbed view of the nature of a subpoena as a “mere discovery device” that is not even “similar” to an investigative order. The New York case law makes it crystalline that a subpoena is the primary investigative implement in the NYAG's tool shed. We also reject the insurers' argument that because the definition does not include a proceeding commenced by service of a subpoena, a subpoena is not included. This reading puts form over substance; the fact that the definition does not say “service of a subpoena” is not dispositive.

'Claims'

Similarly, in Jemmco Partners v. Executive Risk Indemnity, the court ruled that subpoenas from a grand jury, the U.S. Securities and Exchange Commission (SEC), and the Commodities Futures Trading Commission (CFTC) constituted “claims” for purposes of the insurance policy. See Hearing on Motion to Dismiss, No. SOM-L- 486-07 (N.J. Super. Ct., Somerset County, Oct. 12, 2007). Specifically, the grand jury subpoena met the portion of the definition of claim relating to “a criminal proceeding in a court of law,” and the SEC and CFTC subpoenas were “administrative or regulatory proceedings.” See Jemmco Tr. at 34-40. And in Polychron v. Crum & Forster, Inc., the court, in interpreting the undefined term “claim” in the policy, held that a grand jury subpoena and subsequent questioning of an insured bank executive by IRS officials constituted a “claim,” because the subpoena and subsequent questioning “amounted, as a practical matter, to an allegation of wrongdoing.” 916 F.2d 461, 463 (8th Cir. 1990).

Company Insurance Portfolios

Given the recent trend to provide broad coverage to insureds and the potential liability to companies subject to government or administrative investigation, obtaining this type of coverage is critical to a company's insurance portfolio. Several insurers are currently offering policies that provide protection for various government investigations and proceedings. This coverage applies to both for-profit and non-profit entities, and can be tailored to cover actions by specific regulators. Notably, coverage for SEC investigations and proceedings is widely available, as well as coverage for CFTC actions, and those brought by the Environmental Protection Agency (EPA). In addition, many companies are obtaining coverage for investigations and administrative proceedings brought by the Internal Revenue Service, including many non-profit entities.

However, as noted above, in procuring this type of insurance, insureds should understand the various areas of the policies that require negotiation, which is not merely limited to negotiating the definition of “claim.” By way of example, insureds should also negotiate the insurer's ability to control the defense of the underlying actions, as well as the selection of counsel. Further, insureds should negotiate the scope and applicability of any intentional conduct exclusions, as insurers may deny coverage merely upon the assertion of fraud, but many insurers will agree to language where coverage is only excluded upon a final determination of fraud. Given the numerous pitfalls and areas of concern, insureds would benefit from consulting with experienced insurance counsel to ensure the broadest coverage available.

Adrian C. Azer is Of Counsel at Gilbert LLP. He can be reached at [email protected].

An area of significant concern for most companies is an investigation by a government regulator, and the subsequent administrative proceeding. Not only is there the possibility of fines and penalties, but the defense costs incurred in defending against such actions typically far exceed the actual penalty imposed. As a result, companies should plan ahead by obtaining insurance that will insulate their bottom line from government investigations and administrative proceedings.

Insurance Pitfalls

In procuring such insurance, however, insureds should understand the potential pitfalls in the coverages offered by the insurers. One of the significant, disputed areas is what constitutes a “claim” under the insurance policies. Insurers have recently contended that a “claim” only arises once there is a formal investigation commenced by a government agency. However, most government investigations typically begin with the issuance of a subpoena or warrant, not through a formal order of investigation. Accordingly, insurers typically dispute coverage, but courts have recently trended toward providing coverage upon receipt of a subpoena or warrant.

For example, in Protection Strategies, Inc. v. Starr Indemnity and Liability Co., the United States District Court for the Eastern District of Virginia had to determine whether a search and seizure warrant and subpoena, and a letter from a United States Attorney's office noting that the insured was being investigated for purposes of civil liability, were sufficient to trigger coverage under a policy intended to insulate the insured from government inquiries. In holding that the insurer was obligated to reimburse the insured for any defense costs incurred, the court noted that:

Starr's policy uses a broad definition of Claim, which includes any “written demand for monetary, non-monetary, or injunctive relief made against an Insured” (Part 1) and any “judicial, administrative, or regulatory proceeding, whether civil or criminal, for monetary, non-monetary or injunctive relief commenced against an Insured ' by (i) service of a complaint or similar pleading; (ii) return of an indictment, information, or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges” (Part 2).

See No. 1:13-CV-00763 (E.D. Va. Sept. 10, 2013).

Thus, the court concluded that “[t]he search warrant and subpoena fall within this broad definition as both written demands for non-monetary relief and as judicial proceedings commenced by service of a complaint or similar pleading.” Id.

Moreover, in Syracuse University v. National Union Fire Insurance. Co. of Pittsburgh, PA, a New York trial court faced a similar issue. There, the insured received “six subpoenas in connection with state and federal investigations: three grand jury subpoenas duces tecum from the United State's Attorney's Office and three grand jury subpoenas duces tecum from the Onondaga County District Attorney's Office.” No. 2012EF63, 2013 WL 3357812, at *1 (N.Y. Sup. Ct. Mar. 7, 2013). The insurer disputed coverage, contending that the costs “in responding to the investigation subpoenas were not covered under the policy.” Id. at *2.

The court rejected the insurer's position, holding that subpoenas issued to the non-profit plaintiff constituted a claim because they were both “written demand[s] ' for non-monetary relief” and proceedings commenced by the “return of an indictment, information, or a similar document.” Id. at *3-4; see also Dan Nelson Auto. Group v. Univ. Underwriters Group , No. CIV 05-4044, 2008 WL 170084, at *5 (D.S.D. Jan. 15, 2008) (“Civil Investigative Demand and Notice of Intent to Proceed” documents were “claims”). In so ruling, the court relied on the Second Circuit's opinion in MBIA, Inc. v. Federal Insurance Co. , 652 F3d 152, 160 (2d Cir.2011), which similarly rejected an insurer's position that a subpoena does not constitute a “claim”:

We reject the insurers' crabbed view of the nature of a subpoena as a “mere discovery device” that is not even “similar” to an investigative order. The New York case law makes it crystalline that a subpoena is the primary investigative implement in the NYAG's tool shed. We also reject the insurers' argument that because the definition does not include a proceeding commenced by service of a subpoena, a subpoena is not included. This reading puts form over substance; the fact that the definition does not say “service of a subpoena” is not dispositive.

'Claims'

Similarly, in Jemmco Partners v. Executive Risk Indemnity, the court ruled that subpoenas from a grand jury, the U.S. Securities and Exchange Commission (SEC), and the Commodities Futures Trading Commission (CFTC) constituted “claims” for purposes of the insurance policy. See Hearing on Motion to Dismiss, No. SOM-L- 486-07 (N.J. Super. Ct., Somerset County, Oct. 12, 2007). Specifically, the grand jury subpoena met the portion of the definition of claim relating to “a criminal proceeding in a court of law,” and the SEC and CFTC subpoenas were “administrative or regulatory proceedings.” See Jemmco Tr. at 34-40. And in Polychron v. Crum & Forster, Inc., the court, in interpreting the undefined term “claim” in the policy, held that a grand jury subpoena and subsequent questioning of an insured bank executive by IRS officials constituted a “claim,” because the subpoena and subsequent questioning “amounted, as a practical matter, to an allegation of wrongdoing.” 916 F.2d 461, 463 (8th Cir. 1990).

Company Insurance Portfolios

Given the recent trend to provide broad coverage to insureds and the potential liability to companies subject to government or administrative investigation, obtaining this type of coverage is critical to a company's insurance portfolio. Several insurers are currently offering policies that provide protection for various government investigations and proceedings. This coverage applies to both for-profit and non-profit entities, and can be tailored to cover actions by specific regulators. Notably, coverage for SEC investigations and proceedings is widely available, as well as coverage for CFTC actions, and those brought by the Environmental Protection Agency (EPA). In addition, many companies are obtaining coverage for investigations and administrative proceedings brought by the Internal Revenue Service, including many non-profit entities.

However, as noted above, in procuring this type of insurance, insureds should understand the various areas of the policies that require negotiation, which is not merely limited to negotiating the definition of “claim.” By way of example, insureds should also negotiate the insurer's ability to control the defense of the underlying actions, as well as the selection of counsel. Further, insureds should negotiate the scope and applicability of any intentional conduct exclusions, as insurers may deny coverage merely upon the assertion of fraud, but many insurers will agree to language where coverage is only excluded upon a final determination of fraud. Given the numerous pitfalls and areas of concern, insureds would benefit from consulting with experienced insurance counsel to ensure the broadest coverage available.

Adrian C. Azer is Of Counsel at Gilbert LLP. He can be reached at [email protected].