[author: Michael R. Kelley]

Many businesses are subject to government regulation.  From time to time, these government regulators conduct investigations into these business’ operations, which can be very costly and time consuming.

In light of these financial burdens, are the costs of government investigations 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 D&O policies will be triggered in the same fashion.  But, here are some practical takeaways:

1. Your business may have insurance coverage for government investigations under its D&O, fiduciary liability, 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;
3. If government inquiries and actions are a part of the risks that your business faces, you should consider those risks now and negotiate and obtain insurance coverage tailored to those risks.