Posted In: Insurance Recovery
Insurance Blog: Insurance Coverage for Government Investigations
on March 12, 2020
When a company is served with a subpoena or becomes the target of a government investigation, its focus is on hiring counsel, responding to government inquiries, and attempting to convince the government that no offenses have occurred. The focus is not insurance coverage. But, government investigations are expensive, and coverage may be necessary to fight the inquiry, especially in prolonged investigations. Coverage is often available for government investigations, but policyholders facing government investigations must take steps to maximize coverage.
Coverage often depends on whether subpoenas, civil investigative demands (CIDs) or other documents issued as part of governmental investigations satisfy both the “claim” and “wrongful act” definitions in the policyholder’s D&O, E&O or professional liability policy. A claim is typically defined in part as a “written demand for non-monetary relief.” Wrongful Act is typically defined broadly to include an actual or alleged breach of a duty, neglect, error, misstatement, misleading statement, omission, or act by the policyholder. Below is a discussion of the key coverage issues policyholders face.
Does the subpoena or document seek “relief?”
There is a growing trend of case law holding that government investigations manifesting in subpoenas, CIDs, or similar documents constitute a claim — a written demand for non-monetary relief. Astellas US Holding, Inc. v. Starr Indem. & Liab. Co., No. 17 CV 8220, 2018 WL 2431969, at *4 (N.D. Ill. May 30, 2018); Patriarch Partners, LLC v. AXIS Ins. Co., No. 16-CV-2277 (VEC), 2017 WL 4233078, at *4 (S.D.N.Y. Sept. 22, 2017), aff’d, 758 F. App’x 14 (2d Cir. 2018); Minuteman Int’l Inc., 2004 WL 603482, at *7; see also Morden v. XL Specialty Ins., 177 F. Supp. 3d 1320, 1330 (D. Utah 2016); Syracuse University v. National Union Fire Insurance Company, 40 Misc.3d 1205(A) (Supreme Court March 7, 2013), citing Agilis Benefit Services, LLC v. Travelers Cas. and Sur. Co., No. 5:08–CV–213, 2010 U.S. Dist. Lexis, 144499, 30–31 (E.D.Tx.2/24/10). Policyholders should rely on these holdings to refute any denial by the insurers.
Still, other courts have found that such documents do not seek “non-monetary relief,” but merely information to determine whether there would be “any basis for seeking monetary and/or non-monetary relief” from the policyholder. MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 712 F. App’x 745, 754 (10th Cir. 2017); Employers’ Fire Ins. Co. v. ProMedica Health Sys., Inc., 524 F. App’x 241, 252 (6th Cir. 2013). The specific language of a policy can be outcome determinative. For example, in Employers’ Fire, the policy required “relief for a wrongful act,” and, as a result, could not constitute a claim. These cases may have different policy terms or be factually distinguishable, and policyholders should pay close attention to those differences that may impact the scope of coverage that is afforded.
Does the document allege a wrongful act?
Insurers argue that a subpoena or CID does not and cannot “allege” a Wrongful Act. Some courts have agreed with insurers. MusclePharm Corporation v. Liberty Insurance Underwriters, Inc., 712 Fed.Appx. 745, 754 (10th Cir. 2017). However, a recent case before the Delaware Superior Court held that a CID does allege a Wrongful Act. Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., No. CVN 18C12074 MMJCCLD, 2019 WL 2612829, at *6 (Del. Super. Ct. June 24, 2019). Specifically, the Conduent court found that a CID investigating possible Medicaid fraud and activities (which is clearly a Wrongful Act), was sufficient to allege a Wrongful Act. Essentially, the court found that there was no difference between the investigation of an alleged unlawful act by the insured and actually alleging an unlawful act.
While many of these cases depend upon the specific definitions, types of documents, proceedings, and geographic locations of the dispute, there is a trend to consider CIDs and subpoenas as “demands for non-monetary relief” containing allegations of Wrongful Acts and therefore as covered claims. For this reason (and because of the significant costs associated with government investigations), policyholders should take steps to maximize their coverage for these investigations.
Six Steps to Maximize Coverage for Government Investigations
- Upon notice of a government investigation or receipt of a subpoena, CID or similar document, contact the person responsible for insurance: risk manager, general counsel, broker, or outside counsel, to examine and evaluate claims of coverage. With the ever-changing law, complexity of investigation, and differing policy language, be cautious that coverage is often misunderstood; bad advice can cost you coverage.
- Gather all applicable policies – D&O, E&O, EPLI, and professional liability policies.
- Review all policies. Analyze what constitutes a claim; what constitutes a Wrongful Act; and who qualifies as an Insured.
- Strictly follow the notice requirements. When in doubt, provide notice.
- Some claims require immediate notice.
- Some policies may require notice when the insured has knowledge of potential claims, Wrongful Acts, or related acts.
- Demand an immediate defense in the notice letter.
- Actively pursue coverage.
- Respond to all mischaracterizations of fact and coverage.
- Keep insurer apprised of the investigation.
- Engage insurance recovery counsel, if needed, to enforce your rights under the policy(ies).
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.