Business Litigation Reporter October 21, 2015

When The Government Comes Knocking: Maximizing Insurance Coverage for Government Investigations

As many readers will know, a government investigation can begin with something as seemingly innocuous as an email from a governmental agency to a company’s general counsel asking for information, or as attention-grabbing as a search warrant (or even arrests) executed at corporate headquarters. Regardless of how an investigation begins, it rapidly becomes a serious matter that any company must quickly mobilize in response to. Many questions will arise, concerning both the substance of the matter being investigated and how to deal with the government’s demands. Inevitably, though, a senior officer or director of the company will ask a question that may cause even the most seasoned in-house counsel to worry: does our company’s directors and officers (D&O) insurance cover this?

The answer to that question, of course, will depend on the specific coverage terms of your company’s D&O insurance program, as well as the facts and circumstances of the investigation. In this article, we take a close look at some of the key issues associated with D&O insurance coverage for government investigations and discuss how to maximize that coverage if an investigation arises.

Start By Having A Strong D&O Insurance Program Already In Place

The inescapable fact is that once an investigation or other type of claim arises, the insurance coverage is already “baked,” and the matter will be handled pursuant to the coverage terms then in existence. Accordingly, you should confirm that your company’s insurance program is ready and top-notch before an investigation or claim hits. The process is straightforward – start by making sure that your company has been working with an experienced insurance brokerage that has identified the right types of coverages and limits of insurance for your company. Your broker also should have carefully negotiated the terms and conditions of the coverage to ensure your company is getting the best terms the market currently has to offer. Such a review should be done in conjunction with outside counsel to confirm those terms offer the broadest possible coverage.

Know What Constitutes A “Claim” Under The Company’s D&O Coverage, Particularly As To Government Investigations

A threshold question to ask at the outset of a government investigation is whether any communication received from the government constitutes a “claim” as that term is defined under the D&O policy. To answer that question, first refer to the policy’s definition of claim (taking care also to review any policy endorsements that may modify the definition.) Many policies, especially for public companies, will distinguish between claims asserted against “insured persons” (typically directors and officers, and in some cases, employees) and claims against the company itself. The former category of claims may include an investigation of an insured person commenced by the service of subpoena on the person. Alternatively, it may involve the person being identified in writing (for example, through a Wells or target letter) as a subject of an investigation that may lead to a future proceeding. An arrest or extradition attempt may also constitute a claim against an insured person under many policies. Also bear in mind that, in addition to the presence of a claim, policies will often require an allegation of a “wrongful act” against an insured in order to trigger coverage.[1]

More D&O policies these days also contain an additional type of coverage, known as “pre-claim” or “inquiry” coverage, designed to provide enhanced protection to individuals facing a government inquiry. The intent of this coverage, among other things, is to provide coverage for individuals facing requests by a governmental body to appear at a meeting or an interview or to produce documents concerning the company’s business. Unlike a traditional claim, pre-claim coverage may not require that a wrongful act be alleged against an insured in order to trigger coverage.

Make Sure That The Company Understands And Fulfills Its Notice Obligations

Most policies require prompt notice of a claim as a prerequisite to coverage. The importance of this point cannot be understated. Failure to fulfill that obligation may be fatal to your coverage, even if the insurer has not been materially prejudiced. Further, failure to provide notice or providing late notice can potentially bar coverage for later-filed proceedings or other claims relating to the subject matter of the original claim. Even where the impact of late notice is not so drastic, the insurer’s obligation to pay defense costs for a covered claim typically does not start until the date of the claim notice, so prompt notice can also mean the difference between significant legal fees being covered by insurance, or disallowed because they were incurred prior to the notice date. When providing an insurance claim notice, you also must not forget about also providing notice under any “excess” policies that may sit above the “primary” policy.

Take The Time To Work Through And Respond To Any Issues Raised By The Insurer’s “Reservation Of Rights” Letter

If you have provided notice of a claim to your company’s D&O insurers, you will likely receive a “reservation of rights” letter from the insurer detailing the insurer’s view on coverage for the investigation. To preserve its rights (i.e., the right to limit or deny coverage), the insurer is required to identify every ground on which it believes the policy potentially may not cover the claim. Accordingly, a reservation of rights letter, even for a claim that likely will be covered in full, may at times seem voluminous and difficult to decipher. It is important to carefully read and understand the letter and, if necessary, respond in detail to the issues raised. Does the letter, for example, correctly identify the facts and legal allegations at play in the claim? Does it correctly identify and apply the relevant policy terms and coverages? Despite its reserved rights, does the insurer still agree to advance defense costs? While you would think that such issues would be correct as a matter of course, we often find that there are a number of areas in the typical reservation of rights letter which merit a written response in order to set the record straight and fully preserve the insured’s coverage rights. 

Cooperate With The Insurer, And Follow Through On The Company’s Claims Handling Obligations

Most policies require that the insured secure the insurer’s advance consent to the engagement of defense counsel. Likewise, the insurer’s consent typically is required before any defense costs or other loss covered under the policy can be incurred, and insurer consent also is needed before any settlement offers can be made. Failing to secure the insurer’s consent in advance on these kinds of issues could potentially lead to the insurer denying or limiting coverage. At best, it means a potentially difficult and time-consuming post hoc discussion with the insurer concerning why its advance approval was not sought, and why it should nevertheless agree to cover the costs incurred.

A Final Note: Be Prepared, Be Proactive

While our recommendations may seem straightforward, it can be surprisingly difficult for companies to follow through on them when caught up in the midst of responding to a government investigation. Nevertheless, at the end of that government investigation, a key factor in assessing how well the company fared will be what the investigation cost. Maximizing the D&O insurance recovery may play a critical role in allowing a company to get back on its feet and recover effectively. This requires having a strong D&O coverage program in place from the outset, knowing what your obligations are in the event of a claim, and having the right team in place to proactively manage the ongoing responsibilities associated with a complex D&O insurance claim.

[1] Of course, even without the presence of an identifiable “wrongful act” allegation, notice to an insurer of a particular matter may still be advisable under the policy terms