I. INTRODUCTION

Responding to a subpoena can be an expensive proposition. Fortunately, in many instances, a company can call upon its D&O insurer to help defray the significant costs although coverage is often not obtained without some wrangling. This article discusses the main roadblocks that D&O insurers erect to avoid covering subpoena response costs and examines whether and how policyholders can overcome them. It also discusses how to maximize coverage by assessing which response-related costs are covered, including indirect costs.

The subpoena—a writ commanding the production of documents and/or witness testimony—is a widely-used tool in federal and state law enforcement and regulatory investigations. Examples of formal subpoenas include those issued by the U.S. Attorney's Office and state attorneys general. In the wake of the financial crisis of 2008 and revelations concerning high-profile fraud, some regulators such as the U.S. Securities and Exchange Commission (the "SEC") have sought to enhance their subpoena power.1 Regulators such as the Federal Trade Commission and FINRA also issue inquiry letters that do not purport to have the legal status of subpoenas, but recipients may nevertheless view compliance with such letters as mandatory. Whether a subpoena or other information request is directed to a company or its individual director(s) or officer(s), the company will likely incur significant expenses in responding, especially if it views a thorough and punctilious response as a means to head off further legal action and attendant public relations damage.

Among the categories of costs a company may face in responding to a subpoena are the following:

  • Outside counsel fees for review of the subpoena and review and production of documents
  • Cost of internal investigation regarding the subject matter of subpoena
  • Outside counsel fees for ongoing interaction with authorities and regulators
  • Costs relating to locating, preserving and producing documents (e.g., security measures)

In seeking D&O coverage for these and other costs, policyholders often meet with resistance from insurers on several issues. Insurers have questioned—and litigated—whether a subpoena is a "Claim" under the policy; whether the insured must demonstrate that it is a "target" of the investigation in connection with which the subpoena was issued; and whether "voluntary" compliance (e.g., responding to an informal document request or inquiry other than a formal subpoena) is covered. While policyholders should be aware of the legal landscape of the particular jurisdictions whose law governs their policies, there is a general trend emerging to recognize broad coverage for subpoena response costs under D&O policies.

A recent and potentially important decision for policyholders addressing some of the above issues is Syracuse University v. National Union Fire Ins. Co. of Pittsburgh, Pa., 976 N.Y.S.2d 921 (N.Y. App. Div. 2013), in which a New York state appellate court affirmed the trial court's ruling that the insurer was liable for the costs of the insured university in responding to subpoenas. In that case, Syracuse University ("Syracuse") received subpoenas in connection with state and federal investigations of allegations that a former assistant basketball coach, Bernie Fine ("Fine"), sexually abused participants in Syracuse's "Ball Boys" basketball program. The insurer argued that the subpoenas did not constitute "Claims" under the applicable policy, and even if they did, Syracuse was required to prove that it (and not just Fine) was a named target of the investigations. As discussed in greater detail below, the court rejected the insurer's arguments and recognized the potentially broad coverage for subpoenas under the policy.

II. IS A SUBPOENA A "CLAIM" UNDER THE POLICY?

Insurers frequently dispute whether a subpoena constitutes a "Claim" within the meaning of that term as used in D&O policies. With a few outlying exceptions, courts that have passed upon this issue have generally held in the affirmative.

The typical D&O policy contains a definition of "Claim" similar to the following:

  1. a written demand for monetary or non-monetary relief;
  2. a civil, criminal, administrative, regulatory or arbitration proceeding for monetary or non-monetary relief which is commenced by:

    1. service of a complaint or similar pleading;
    2. return of an indictment, information, or similar document (in the case of a criminal proceeding); or
    3. receipt or filing of a notice of charges

A number of courts have held that a subpoena constitutes a "demand for . . . non-monetary relief."

For example, in Minuteman International, Inc. v. Great American Ins. Co., 2004 WL 603482 at *2 (N.D. Ill. Mar. 22, 2004), the insured was issued subpoenas by the SEC and complied with them by producing documents; the insured sought coverage for the associated legal costs. The insurer argued that the SEC proceedings did not constitute a Claim under the policy (which contained a definition of "Claim" similar to that above), because they did not seek a binding adjudication of liability. The U.S. District Court for the Northern District of Illinois rejected this argument, holding that the subpoenas constituted a claim. The court, noting that the policy's definition of Claim was not limited to a lawsuit but only required a demand for nonmonetary relief, concluded: "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." Id. at *7. The court further noted that if the insured failed to comply with the subpoenas, the SEC could have brought suit in court to require compliance.

Similarly, in Syracuse University, 975 N.Y.S.2d 370 (N.Y. Sup. Ct. 2013), aff'd, 976 N.Y.S.2d 921 (2013), the insurer argued that subpoenas from the U.S. Attorney's Office and county district attorney's office in connection with their respective investigations into alleged sexual abuse were not claims under the applicable policy. The New York Supreme Court, recently affirmed by the Appellate Division, held that under the policy's definition of "claim," the plain meaning of the term "non-monetary relief" encompasses a subpoena because "a subpoena is a grand jury's means of preventing or redressing a wrong by enforcing the public's right to 'every man's evidence.'" Id. at *2. The court cited a Second Circuit case, MBIA Inc. v. Federal Ins. Co., also discussed below, which concluded:

We reject the insurers' crabbed view of the nature of a subpoena as a "mere discovery device" that is not even "similar" to an investigative order. The New York case law makes it crystalline that a subpoena is the primary investigative implement in the NYAG's toolshed. We also reject the insurers' argument that because the definition [of Claim] does not include a proceeding commenced by the service of a subpoena, a subpoena is not included. This reading puts form over substance; the fact that the definition does not say "service of a subpoena" is not dispositive.

652 F.3d 152, 160 (2d Cir. 2011). Importantly, after losing at the intermediate appellate level, the insurer appears to have agreed to settle with Syracuse rather than risk taking the fight to the New York Court of Appeals.

Another recent case illustrating the breadth with which courts have construed the D&O policy's "demand for non-monetary relief" language is Protection Strategies, Inc. v. Starr Indemn. & Liab. Co., No. 1:13-cv-00763 (E.D. Va. Sept. 10, 2013), in which the U.S. District Court for the Eastern District of Virginia held that a search and seizure warrant and subpoena issued by the Inspector General of NASA were Claims. The Protection Strategies court relied on the trial court decision in Syracuse as precedent. This appears to be a case of first impression involving a NASA subpoena.

Courts also have found coverage for subpoenas when the term "claim" is undefined in the policy. For example, Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461 (8th Cir. 1990), dealt with a grand jury subpoena that was served on a bank. Polychron, an individual insured under the bank's policy, sought coverage for his legal expenses. The policy did not define "claim." The court concluded that "claim" meant "'to demand as one's own or as one's right; to assert; to urge; to insist,'" and not just "cause of action." The court held that this definition of claim was broad enough to include the subpoena, which was directed to the bank but demanded documents related to Polychron's conduct, as well as the questioning of Polychron himself. The Eighth Circuit affirmed, noting that the insurer's characterization of the investigation as "mere requests for information . . . underestimates the seriousness of such a probe. As later events proved, [Polychron] was the target of the investigation." Courts in New York, Illinois, and other jurisdictions have similarly found coverage absent a definition of "claim."2

III. IS THE INSURED A TARGET?

As articulated by one court, "the case law suggests that Subpoenas and Investigative demands may constitute Claims where they are issued by government investigative agencies related to an investigation of the insured." ACE Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789, 796 (D. Md. 2008) (emphasis added). Accordingly, case law suggests there may be a distinction between an insured who is an explicit target of the investigation in connection with which the subpoena was issued, and an insured who is merely being called upon to give evidence in an investigation of someone else. In the latter case, certain courts conclude that coverage only may be available if there is a reasonable basis for believing that the insured may become a target in the future.

A. To Whom Is the Subpoena Addressed: Form Over Substance?

Some courts have fixated on the addressee of the subpoena to determine its "target." This approach is one of form over substance, and is shown to be problematic by the following example, drawn from our experiences obtaining entity coverage under a D&O policy for subpoena response costs. Suppose a subpoena from a law enforcement authority is addressed to an individual corporate officer at his or her business address (i.e., the company's address). Because no litigation has been filed, there is no caption on the document specifying the name of a "defendant." The subpoena states that it is in reference to certain alleged statutory violations but does not specify who was alleged to have committed the violations. The subpoena's document requests are not clearly limited to an investigation of the director's activities, but also call for the production of broader company records. As the investigation continues, the authorities address follow-up requests to counsel for the company, not the director.

As the foregoing illustrates, it is not always clear from the face of a subpoena whether it is directed to the addressee in his or her individual capacity, or in an official capacity as a corporate representative (in which case, the company is the apparent "target"). And, in any event, investigations often expand beyond the scope of the original subpoena to involve other individuals and/or the company itself. Under these circumstances, the company reasonably believed it was a potential target of a government investigation, even though it was not certain whether it was the formal addressee of the subpoena.

Policyholders must be wary that even when faced with a complex set of facts suggesting that the insured is a target of the investigation, some courts have focused on the addressee of the subpoena. For example, in Catholic Health Services of Long Island, Inc. v. National Union Fire Ins. Co., 847 N.Y.S.2d 638, 639 (N.Y. App. Div. 2007), the insured ("Catholic") and several of its subsidiary hospitals formed a joint venture ("LIHN"), for which Catholic had provided 43% of the capital. Catholic and its subsidiaries were named insureds under a D&O policy, but LIHN was not a named insured. The New York Attorney General addressed an investigative subpoena to LIHN and served it upon LIHN. The subpoena "stated that the material sought was relevant to 'a confidential investigation into whether the activities of [LIHN] and the joint activities of hospitals within LIHN' violated [antitrust law]. The accompanying interrogatories defined LIHN broadly as including, inter alia, not only LIHN, but also any entity owning at least 20% ownership interest in LIHN." Id. at 640 (emphasis added). Catholic incurred legal costs in responding to the subpoena and sought coverage. The court, affirming the trial court below, held that LIHN, to whom the subpoena was addressed, was the target of the subpoena, and since LIHN was not a named insured under the policy, Catholic's costs were not covered. The court thus seemingly ignored the fact that the insured, Catholic, was arguably included in the subpoena's definition of "LIHN" due to its ownership stake.

Other courts, however, have looked beyond the caption of the subpoena to the substance of specific inquiries to determine that the insured was "a target of the investigation, not simply a source of information." ACE Am. Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789 (D. Md. 2008).

B. Syracuse University

In Syracuse University, 975 N.Y.S.2d 370, the insurer argued that Syracuse was required to prove that it was a named target of the investigations. The court rejected this argument, citing the broad duty to defend standard. The court explained that Syracuse could be considered a target of the investigations by virtue of its potential liability. The court noted that "any liability of [Syracuse] was necessarily dependent on the predicate liability of Fine . . . Therefore, even the questions dealing with Fine's conduct are relevant to [Syracuse's] potential liability." The court analyzed the particular document requests and found that, insofar as the subpoenas sought information about events that occurred after Fine's departure from the university, the investigations were at least partly concerned with an institutional cover-up by Syracuse, even if Syracuse was not a formal target. The court also noted that if the U.S. Attorney had found evidence of criminal conduct by Syracuse as a result of its answers to questions about Fine, Syracuse likely would have become a formal target of the investigation.

Syracuse University, then, is an example of a case in which a court found D&O coverage for the subpoena response costs of an insured who reasonably believed it was a potential target of an investigation. As noted above, the insurer chose not to challenge this holding in New York's highest court.

IV. WHAT TYPES OF RESPONSE COSTS ARE COVERED?

Assuming that a subpoena is a "Claim," the insurers often take the position that they are only obligated to cover legal costs directly incurred in responding to formal subpoenas—e.g., outside counsel fees for reviewing and producing documents to a law enforcement authority pursuant to an order, noncompliance with which could result in legal action. There is dispute over whether insurers must also cover indirect costs such as internal investigations relating to the subject matter of a subpoena, or costs relating to "informal" information requests by regulators. In wrangling with insurers over these issues, policyholders should keep in mind the broad insurance law principle that defense costs include costs that an insured incurs to minimize its potential liability, to the ultimate potential benefit of the insurer.3 However, policyholders must be wary that with specific reference to D&O coverage of subpoena response costs, the law is not settled on these questions, and the two leading cases come out opposite ways.

A. MBIA

In MBIA v. Federal Ins. Co., 652 F.3d 152 (2d Cir. 2011), the Second Circuit found coverage for costs incurred in voluntarily complying with investigations to be outside of the context of a formal subpoena. In that case, the insured ("MBIA") sought coverage of costs associated with complying with several subpoenas issued by the SEC and New York Attorney General ("NYAG"), as well as its voluntary cooperation with the SEC and NYAG's subsequent informal document requests. After issuing initial subpoenas, the SEC and NYAG had considered issuing additional subpoenas; MBIA asked the regulators whether they would accept voluntary compliance with their demands for records in lieu of subpoenas to avoid adverse publicity for MBIA. The regulators agreed to those requests, and MBIA complied with their demands for documents. The insurers denied coverage for the costs incurred in this process, arguing, inter alia, that "these investigations were conducted by way of oral request rather than subpoena or other formal process." Id. at 161. The court rejected the insurers' argument:

The investigation, oral or by way of subpoena, was connected to the formal order [i.e., the initial subpoenas]. The sole reason the SEC did not issue subpoenas is that MBIA requested this procedure, and the SEC believed that MBIA would fully comply on a voluntary basis. The insurers cannot require that as an investigation proceeds, a company must suffer extra public relations damage to avail itself of coverage a reasonable person would think was triggered by the initial investigation.

Id. The court also found that costs incurred by MBIA's special litigation committee in hiring outside counsel to investigate a shareholder derivative suit were covered defense costs.

Thus, the MBIA court correctly recognized the reality of the insured's situation—that cooperating with regulators on an informal basis was a necessary part of defending a formal subpoena and heading off additional proceedings, and likewise, conducting an internal investigation was a necessary part of its overall defense strategy.

B. Office Depot

The Eleventh Circuit, however, held in Office Depot, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa. that voluntary compliance with SEC inquiry letters and investigation costs for potential claims were not covered under the applicable D&O policy. 453 F. App'x 871 (11th Cir. 2011). In that case, the SEC issued "letters of inquiry" to the insured ("Office Depot"), which the SEC did not consider to be "formal proceedings," although it advised recipients that they may be subject to formal proceedings, including indictment, if any false information was submitted in response. Office Depot cooperated with the SEC's inquiries by producing documents and appearing for depositions, without requiring the SEC to issue formal subpoenas. Subsequently, however, the SEC did issue subpoenas and initiated a formal investigation. The insured sought, and the D&O insurer denied, coverage for the legal costs incurred in voluntarily responding to the SEC's inquiry letters and for an internal investigation it conducted after receiving those letters (but before receiving formal subpoenas).

The court concluded that the SEC's letters of inquiry did not "allege that [securities] violations have occurred or identify specific individuals that could be charged in future proceedings." Id. at 876. The court focused on the policy's definition of "Securities Claim," which provided coverage for "an administrative or regulatory proceeding," holding that this definition did not encompass coverage of the mere "regulatory investigation" initiated by the SEC's letters of inquiry. Moreover, the policy's definition of Defense Costs provided that the costs must "result solely from the investigation, adjustment, defense and/or appeal of a Claim . . . ." Id. at 877 (emphasis added). While the formal subpoena eventually issued by the SEC was a Claim, compliance with informal inquiry letters and an internal investigation that preceded the Claim could not be said to "result solely" from the Claim and were therefore not covered.

Office Depot is perhaps distinguishable from cases in which different policy language is at issue.

C. Unanswered Questions

There is precious little case law on whether other, indirect subpoena response costs are covered under D&O policies. For example, suppose that a high-profile insured receives a subpoena and hires a firm to perform "crisis management," including by informing the media that the insured is complying with the subpoena and in any event is not guilty of any wrongdoing. Are the firm's fees "defense costs," inasmuch as they are part of the insured's strategy for avoiding further subpoenas or investigations? Or, suppose that an insured has reason to believe that a former or current employee may attempt to frustrate the insured's compliance with a subpoena by removing records from the premises, and the insured accordingly hires a security service to protect them. Are these costs covered? There are a host of other "ancillary" and supporting costs that may be incurred when a subpoena crosses the transom.

The above questions are thus far unanswered, but will undoubtedly be tested as regulators such as the SEC issue more subpoenas, and policyholders continue to seek D&O coverage for response costs.

V. CONCLUSION

While it must be emphasized that a policyholder's entitlement to coverage is dependent upon the precise language of the policy at issue and the specific facts of each case, the recognition by many courts that a subpoena is a "Claim" under D&O policies opens the door for potential recovery in a variety of circumstances. While it is not settled whether certain indirect costs are considered "defense costs," or whether compliance with informal information requests is covered, policyholders should take heart that the general trend is toward a broad construction of D&O coverage.

Footnotes

1 Zachary A. Goldfarb, SEC Enforcement Division Granted Permanent Subpoena Powers, THEWASHINGTON POST, Aug. 12, 2010, available at http://www.washingtonpost.com/wp-dyn/content/article/2010/08/11/AR2010081106274.html

2 E.g., MTB Bank-in-Liquidation v. Lloyd's Underwriters, 776 N.Y.S.2d 789 (N.Y. App. Div. 2004) ("claim" not defined but broad enough to include grand jury investigation); Richardson Elecs., Ltd. v. Fed. Ins. Co., 120 F. Supp. 2d 698, 701 (N.D. Ill. 2000) ("claim" not defined in policy, but construed to mean "'a demand for something due'") (citation omitted).

3 E.g., N.Y. v. Blank, 745 F. Supp. 841, 852 (N.D.N.Y. 1990), aff'd, 27 F.3d 784 (2d Cir. 1994) (holding that insurer had an obligation to reimburse insured for "all defense costs which [insured] incurred for services rendered which are useful in defending against the [ultimate] complaint . . . Common sense argues that [insurer] is benefitted by the early actions taken by [insured] to defend this action and, thereby, ultimately reduce any potential assessment of damages."); Medmarc Casualty Ins. Co. v. Angeion Corp., 419 F. Supp. 2d 1112, 1122 (D. Minn. 2006) ("Defense costs include attorney's fees and consultant costs that are 'reasonably necessary either to defeat liability or to minimize the scope or magnitude of such liability.'" (internal citation omitted)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.