INSURANCE COVERAGE FOR THE COSTS OF RESPONDING TO A CID OR GOVERNMENT SUBPOENA AND THE IMPORTANCE OF PROMPT NOTICE

Key Takeaways:

• Companies should promptly notify their insurers as soon as a government subpoena, CID or other governmental inquiry is received.
• There may be coverage available under companies’ D&O, E&O or other liability policies for the potentially substantial costs of responding to a government investigation.
• Even if there is no coverage for the costs of responding to the government’s initial investigation, prompt notice to the companies’ insurers protects the company in the future if a related lawsuit or enforcement proceeding is brought one or more years later.

For many companies, particularly those in highly regulated industries, the receipt of a civil investigative demand (CID) or subpoena from the government can understandably trigger stress. What might not be top of mind is whether the substantial legal fees and other costs incurred responding to such governmental inquiries are covered by the company’s insurance policies. But it should be.

In many jurisdictions, and under the language of many policies, a government subpoena or CID is a covered “Claim” for a “Wrongful Act” that entitles the insured to recover from its insurer the costs of responding by producing documents or deposition testimony. Companies should be aware that such coverage may exist and should promptly notify their insurers upon receipt of a government subpoena or CID so as not to forfeit the coverage that may be available. But even if the insurer does not agree to pay for the costs of responding, at a minimum, giving the insurer prompt notice is a prudent step to ensure that coverage will be in place down the road if the government’s initial investigation later turns into an actual enforcement proceeding.

Is a CID or Government Subpoena a “Claim” that is “For” or “Alleging” a “Wrongful Act”?

Whether the costs of responding to a CID or government subpoena are covered by insurance depends on whether the CID or subpoena (1) is a “Claim” (as defined in the policy); (2) for or alleging a “Wrongful Act.” Courts across the country have assessed both questions on numerous occasions with no clear judicial consensus emerging, even among those courts that have construed identical (or nearly identical) policy wording.

The "Claim" Definition

The definition of “Claim” can vary significantly from policy to policy. Some directors and officers (D&O) and errors and omissions (E&O) liability policies define “Claim” to specifically include all administrative or regulatory investigations or proceedings. See Guaranteed Rate, Inc. v. Ace Am. Ins. Co., 2021 Del. Super. LEXIS 552 (Del. Super. Ct. Aug. 18, 2021). Other policies may include only government proceedings, but not investigations, within the definition of a “Claim.” See MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 712 Fed. Appx. 745 (10th Cir. 2017). Still, other policies take a middle road – only a government “proceeding” will be a “Claim,” but the “proceeding” is deemed commenced by the filing of an “investigative order” or similar document, see MBIA, Inc. v. Fed. Ins. Co., 652 F.3d 152 (2d Cir. 2011), or receipt of a subpoena identifying the insured as a person or entity against whom a proceeding may be brought, see Biochemics, Inc. v. Axis Reinsurance Co., 924 F.3d 633 (1st Cir. 2019). The best D&O and E&O policies include express terms making clear that any government investigations – or at least those commenced by receipt of a subpoena or CID – are covered Claims; companies should ask their insurance brokers about obtaining such coverage if their existing policies do not already include it.

But even in the absence of such express policy wording, virtually every policy’s definition of “Claim” includes a “written demand for monetary or non-monetary relief.” Is a subpoena or CID seeking the production of documents or testimony a demand for “non-monetary relief”? Some courts have said no.[1] But many others have said yes.[2] Accordingly, the answer may depend on the choice of governing law (as is often the case in questions of insurance coverage). Those courts which have found a subpoena or CID to be a demand for “non-monetary relief” have explained that “just as being required to produce documents or provide testimony would be relief in a court proceeding seeking enforcement of an SEC subpoena, the relief sought by the subpoena itself is the production of documents or testimony.” Minuteman Int’l, Inc. v. Great Am. Ins. Co., 2004 U.S. Dist. LEXIS 4660, *22 (N.D. Ill. March 22, 2004).

Whether a Subpoena or CID “Alleges” or is “For” a “Wrongful Act”

Of the decisions finding no coverage for the costs of responding to a government subpoena or CID, most are actually based on the policy’s insuring agreement language rather than the definition of “Claim.” That is because irrespective of whether the subpoena or CID constitutes a Claim, there is no coverage under the insuring agreement unless that Claim is “for a Wrongful Act” or “alleging a Wrongful Act.” To determine whether that requirement is met, many courts (but not all) will give close scrutiny to the language of the subpoena itself or the language of the investigative order that authorized the subpoena or CID. If the subpoena or the order merely states that the government is investigating the possible commission of a crime, without specifically alleging that a crime has occurred, many courts will find that it is not a Claim “for a Wrongful Act” (assuming the subpoena is a “Claim” at all). See, e.g., Emplr’s Fire Ins. Co. v. Promedica Health Sys., 524 Fed. Appx. 241, 247-51 (6th Cir. 2013); Conn. Mun. Elec. Energy Corp. v. Nat’l Union Ins. Co., 2021 U.S. Dist. LEXIS 173998, *31-34 (D. Conn. Sep. 14, 2021); MusclePharm, 712 Fed. Appx. at 756-57. Indeed, sometimes the subpoena specifically states that the government has not yet determined whether any wrongful conduct has occurred. See, e.g., MusclePharm, 712 Fed. Appx. at 756; Promedica, 524 Fed. Appx. at 247-48.[3]

By contrast, sometimes a CID, subpoena or the investigative order authorizing their issuance will specifically identify the recipient or the target of the investigation as a person or entity against whom an enforcement proceeding might be brought if certain suspected wrongful conduct is established. Under those circumstances, most courts will find that the subpoena / investigation is “for” an alleged Wrongful Act. See, e.g., Oceans Healthcare, 379 F. Supp. 3d at 564-65; Weaver v. Axis Surplus Ins. Co., 2014 U.S. Dist. LEXIS 154746, *35-39 (E.D. N.Y. Oct. 30, 2014).

Other courts, however, have found investigative subpoenas or CIDs to be “for” an alleged Wrongful Act even if the subpoena or CID itself includes no such express allegations. See, e.g., Astellas, 2018 U.S. Dist. LEXIS 897725, at *16-17; Conduent, 2019 Del. Super. LEXIS 298, at *13; Biochemics, 924 F.3d at 643. These courts reason that the purpose of a government subpoena or CID is to investigate the possibility of alleged wrongful acts that may violate the law. Accordingly, it makes no difference whether the subpoena or CID itself actually includes allegations of the wrongful acts being investigated. See Conduent, 2019 Del. Super. LEXIS 298, at *13.[4] That is especially so if the policy’s insuring agreement refers to Claims “for” a Wrongful Act – construing “for” to mean “because of” – rather than Claims “alleging” a Wrongful Act.[5] See Astellas, 2018 U.S. Dist. LEXIS 897725, at *16-17.

In sum, variations in policy wording and differences in state law make it impossible to assert, as a blanket proposition, that a government subpoena or CID is or is not a “Claim” for a “Wrongful Act” within the scope of coverage of most liability policies. Notwithstanding that uncertainty, however, we can state as a blanket proposition that when a government subpoena or CID is received, policyholders should notify their insurers immediately. Aside from the obvious fact that an insurer will not pay any defense costs for a Claim of which it is never notified, failure to timely notify one’s insurer of the subpoena or CID can jeopardize coverage for future lawsuits or enforcement proceedings that concern the same underlying facts as the initial government investigation. The cases discussed below highlight this risk.

Delayed Notice of a Government Subpoena or CID Can Result in Forfeiture of Coverage for Related Lawsuits or Proceedings That Are Brought in Later Years

Sometimes, the immediate costs of responding to a subpoena or CID can be minimal enough that the receiving company might think that notice to its insurer is unnecessary. For example, if the anticipated costs of responding are likely to fall within the policy’s retention; or sometimes the company does not notify its insurer because it does not regard the government’s inquiry as a covered claim (perhaps based on the authorities discussed above.) Failure to give prompt notice of a subpoena, CID or other governmental inquiry under such circumstances would be a mistake!

While an insured company might be willing to pay $50,000 or $100,000 of legal fees responding to a subpoena on its own, if the investigation later develops into a full-blown enforcement proceeding, or if a civil lawsuit is commenced based on the same underlying facts and circumstances, the company is likely to wish it had the benefit of its insurance policies to pay for those ballooning costs. Coverage for those later proceedings may be lost if the company does not give prompt notice – within the policy period – of the initial investigation and subpoena / CID.

Indeed, several of the cases discussed above arose in the context of an insurer denying coverage for a lawsuit or government enforcement proceeding on the basis that the “Claim” was first made at the time of an earlier subpoena, CID or investigative order that pre-dated the policy period.[6] In Patriarch Partners, 2017 U.S. Dist. LEXIS 155367 (S.D.N.Y. Sep. 22, 2017), for example, the insured company lost $5 million of coverage under one of its excess policies for an SEC enforcement proceeding because it failed to give notice of the SEC’s first subpoena and investigative order. The court determined that the subpoena and investigative order were each a “Claim” that had been made before the policy period, and the SEC’s enforcement proceeding was merely a continuation of that Claim. Because the insured had not notified its insurers during the policy period when the subpoena and investigative order were issued, it forfeited coverage for the later related enforcement proceeding. See also Biochemics, 924 F.3d 633 (same).

Even if the first government subpoena or CID does not constitute a “Claim” under the policy terms or applicable law, failure to give notice of that subpoena / CID during the policy period when it is received can still jeopardize coverage for future lawsuits or enforcement proceedings arising out of the same facts being investigated. That is because the insurers who issued the policies in effect when the lawsuit or enforcement proceeding is commenced may argue that “prior knowledge” exclusions in their policies are implicated or, if the prior investigation was not disclosed during the policy application or renewal process, the insurer may seek to avoid coverage or rescind the policy on that basis. See, e.g., Quanta Specialty Lines Ins. Co. v. Investors Capital Corp., 2009 U.S. Dist. LEXIS 117689, at *43-58 (S.D.N.Y. Dec. 17, 2009); Infinity Q Capital Mgmt. v. Travelers Cas. & Sur. Co., 2022 Del. Super. LEXIS 363, at *30-38 (Del. Super. Ct. Aug. 15, 2022).

What Should Companies Do Upon Receipt of a Subpoena, CID or Other Government Inquiry?

The lesson to be learned from the cases discussed herein is that companies must ensure that their insurers are promptly notified when the government begins an investigation of the company or its executives. If the government investigation constitutes a “Claim” under the terms of the policy and applicable law, prompt notice will ensure coverage for the company’s potentially substantial costs of responding to the government’s inquiry. And even if the subpoena or CID is not a “Claim,” by giving insurers notice during the policy period when the first subpoena is received, the company will (1) “lock in” coverage under those policies for any future enforcement proceeding or lawsuit that arises out of the same matters being investigated, and (2) avoid having to overcome “prior knowledge” or non-disclosure defenses to coverage under future policies.

To end where we started, amidst the stress and difficulty of dealing with a government investigation, notifying one’s insurers of the government’s requests for information may not always be among the company’s top priorities. But it should be. Drafting a simple notice to insurers advising of receipt of a CID or government subpoena is an easy and inexpensive step to take, but failure to do so can have serious consequences, including the potential loss of tens of millions of dollars in insurance coverage. If you or your company has recently received a government subpoena, CID or other governmental inquiry, Foley Hoag’s insurance recovery group is here to help you maximize the available insurance coverage and avoid potential traps for the unwary.

[1] See, e.g., Diamond Glass Cos. V. Twin City Fire Ins. Co., 2008 U.S. Dist. LEXIS 86752, at *11-13 (S.D.N.Y. Aug. 18, 2008); MusclePharm, 712 Fed. Appx. at 754; Biochemics, 924 F.3d at 640-41.

[2] See, e.g., Patriarch Partners, LLC v. Axis Ins. Co., 2017 U.S. Dist. LEXIS 155367, at *13-14 (S.D.N.Y. Sept. 22, 2017); Minuteman International v. Great American Insurance Co., 2004 U.S. Dist. LEXIS 4660, at *21-22 (N.D. Ill. Mar. 22, 2004); Syracuse Univ. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2013 N.Y. Misc. LEXIS 2753, at *8-11 (N.Y. Sup. Ct. March 7, 2013); Astellas US Holding, Inc. v. Starr Indem. & Liab. Co., 2018 U.S. Dist. LEXIS 897725, at *13-14 (N.D. Ill. May 30, 2018); Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., 2019 Del. Super. LEXIS 298, at *11 (Del. Super. Ct. June 24, 2019); Oceans Healthcare, L.L.C. v. Ill. Union Ins. Co., 379 F. Supp. 3d 554, 562 (E.D. Tex. March 30, 2019).

[3] But see Biochemics, Inc. v. AXIS Reinsurance Co., 924 F.3d 633, 643-44 (1st Cir. 2019), finding that an SEC subpoena was “for a Wrongful Act” even though the letter accompanying the subpoena specifically stated that the “investigation . . . should not be construed as an indication by the [SEC] that any violation of law has occurred.”

[4] The Delaware Superior Court’s decision in Conduent – and the subsequent approval of its reasoning by the court in Guaranteed Rate, Inc. v. Ace Am. Ins. Co., 2021 Del. Super. LEXIS 552 (Del. Super. Ct. Aug. 18, 2021) – is particularly important due to the fact that so many companies are organized under Delaware law, and thus, the D&O policies issued to such companies are governed by Delaware law. The Conduent decision also includes a nice summary of the case law from other jurisdictions going both ways on whether a subpoena or CID is a covered “Claim” for an alleged “Wrongful Act.”

[5] Under the latter wording, there would be a stronger textual basis for arguing that the Claim itself (i.e., the subpoena or CID) must actually “allege” the Wrongful Act rather than simply have been issued or commenced because of an alleged Wrongful Act.

[6] See, e.g., Patriarch Partners, 2017 U.S. Dist. LEXIS 155367; Promedica, 524 Fed. Appx. 241; Weaver, 2014 U.S. Dist. LEXIS 154746; Biochemics, 924 F.3d 633; Telligen, Inc. v. Atl. Specialty Ins. Co., 413 F. Supp. 3d 842 (S.D. Iowa 2019).