Today's blog post is the second video in a three-part series addressing steps that policyholders should take to maximize insurance recovery for governmental investigations under D&O insurance policies. Public and private companies are frequently the subject of governmental investigations. Defense of these proceedings is expensive. It is not atypical for defense costs to exceed $10 million for a typical investigation, with larger investigations costing hundreds of millions of dollars.

There are a number of steps that policyholders take to maximize insurance recovery for governmental investigations. Because defense of governmental investigations is typically front end loaded, the issue of when defense coverage is triggered is a critical. If coverage is triggered when a lawsuit is filed, coverage may be useless in a situation where a claim is settled prior to the filing of a formal lawsuit. Coverage under a D&O policy should be triggered prior to the government's issuance of a Wells Notice, target letter or other formal order of investigation. Policy language to this effect allows for recovery defense costs incurred responding to voluntary information requests and other events that typically occur early on in the government's inquiry. Likewise, a well-negotiated D&O policy should cover investigations even where the company is not the primary target of the government's inquiry.

We have included a transcript below:

Steps to Maximize D&O Coverage for Investigations – Part 2

The second issue you should focus on when you're purchasing your D&O insurance is what triggers coverage for investigations. Typically an insurance policy would define a claim to include a governmental investigation upon service of a target letter or a Wells notice or some other formal document. If you're a director or an officer of a company and you get served with a Wells notice, you get coverage under your policy for costs that you incur in responding to the investigation from that point forward.

Again, anyone who's actually been subject to one of these investigations knows that you can spend millions and millions of dollars responding to the government's inquiry before the time that the government actually issues a target letter or a Wells notice. Again, under most policies this wasn't covered. One of the things that you want to focus on when you're purchasing and negotiating your D&O insurance is language that provides that you get the coverage for investigations prior to the time of, let's say, a formal investigation. You want to keep that language as broad as possible and you want the coverage to begin as early in the investigation process as possible.

Another issue to be on the lookout for when you're negotiating your policy is requirement of a wrongful act. Many D&O policies define claim as an investigation for a wrongful act. And so, you might have an investigation launched against you, but unless the government articulates some specific or express conduct that they're investigating or some action that they claim you've done, an insurer can deny coverage for the claim.

We actually had a client several years ago who had an issue with this wrongful act requirement. Our client was served with subpoenas and information requests from the SEC in connection with an investigation of a totally unrelated third party who was being investigated under, I believe it was the Foreign Corrupt Practices Act. Our client had done some business with this company, and so in the subpoenas and in the documents that our client received from the government there was no expressed allegation that we had done anything wrong. The insurer looked at the language in the policy, which required or that provided coverage for claims alleging a wrongful act, and said, "Hey, there's nothing that's been alleged against you guys. It's unclear to us whether or not you're an actual target of this investigation or whether you're being viewed as a source of information for the government's investigation against this unrelated third party."

As a result of that we were forced to file a lawsuit against the insurance company. Our client incurred some expense in connection with that lawsuit. Ultimately we resolved it through mediation and got coverage for the claim, but again, it was a fairly large hassle for our client and it was a hassle that was created because they didn't have the best policy language for investigations in the policy.

To view the video click here

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series.