[author: Michael Kelley]

Dealers are heavily subject to government regulation. From time to time, these government regulators conduct investigations into a dealer’s business operations and such investigations can be very costly to the regulated business. The first question for a dealer to its insurance company should be “Are the costs of a government investigation covered by insurance?”

Two recent court decisions conclude that the answer is YES – if a formal or informal government proceeding has been commenced.

In Home Depot v. National Union Fire Insurance Co., Home Depot spent $23 million in internal investigation costs, including counsel and forensic accountant fees, in response to a notice of “impending inquiry” from the Securities and Exchange Commission (“SEC”). In MBIA, Inc. v. Federal Insurance Company, the financial services company incurred costs of more than $6.5 million in responding to subpoenas from the SEC and the New York Attorney General.

The court found that most of Home Depot’s costs were not covered under its Director’s & Officer’s (D&O) insurance policy because most of the expenses were incurred before any formal or informal government inquiry actually commenced. On the other hand, since MBIA’s costs were incurred after subpoena’s were issued, its D&O policy did cover the costs of the investigation.

The cases were very fact specific and dependent on the specific policy language. Not all insurance policies will be triggered in the same fashion. But, here are some practical takeaways:

1. A dealer may have insurance coverage for government investigations under its insurance policy, or other specialized coverages;
2. Part of the strategy in responding to government inquiries should take into consideration the language of the potentially applicable insurance policy; and
3. If government inquiries and actions are a part of the risks that a business faces, a dealer should consider those risks now and negotiate and obtain insurance coverage tailored to those risks.

As the son a of a new car dealer, Mike Kelley grew up washing cars at the family dealership. Mike is also the Chair of the McNees Insurance Recovery Group, which helps dealers understand their insurance coverage, submit claims and, where appropriate, sue insurance companies for failing to honor legitimate claims. McNees handles insurance issues for all kinds (auto, property, liability, fire, professional liability, environmental, D&O, medical, etc), and against companies from Allstate to Zurich. If a dealer needs insurance assistance, contact Mike Kelley or the McNees Insurance Recovery Group at (717) 232-8000, or at www.mwn.com.