United States: Government Investigators At Your Door? Check Your Insurance Policies

A governmental entity may initiate an investigation with something as seemingly innocuous as an "informal" request for information, or as ground shaking as armed government officials executing a full-blown search and seize warrant at your company's headquarters. In either scenario, the ensuing investigation is likely to be expensive, time consuming, and a distraction from your business operations. Any governmental investigation can quickly escalate into an extensive and protracted inquiry that forces your company to spend significant time, resources, and legal fees responding to (and defending against) the government's investigatory demands. These investigations may also result in subsequent legal or administrative enforcement actions, which expose the company and its directors and officers to potential liability for damages, fines, penalties, and other financial obligations. These actions pose a serious threat to the organization and its top brass, and must be met with a vigorous defense. The crucial question is: How will you pay for your response and defense?  The answer may lie with your insurance portfolio.

Evaluate your insurance policies for coverage

A company should evaluate all of its insurance policies when faced with a governmental investigation. The broad scope of investigations, and the corresponding breadth of possible enforcement actions, may implicate several types of insurance policies, including Errors & Omissions ("E&O"), Professional Liability, Directors' and Officers' Liability ("D&O"), Crime/Fidelity Insurance, and Employment Practices Liability ("EPL") policies. Do not overlook potential sources of recovery simply because conventional wisdom—or an insurer—suggests that such policies "is not meant for this type of claim."

D&O and E&O policies are the most likely sources of coverage for a regulatory investigation or enforcement action. Typically, a company does not need to be sued or charged for its investigation costs to be covered by insurance. While definitions of "claim" vary widely, they almost always include lawsuits, written demands for money and non-monetary relief, and administrative proceedings. Numerous courts have recognized that subpoenas and other investigatory demands that compel the production of information or documents constitute demands for "non-monetary relief." A policy may not define the word "claim" and, in that situation, courts look to lay dictionaries for the interpretation of an undefined term.  Dictionary definitions of "claim" are exceedingly broad, e.g., "a demand for something due or believed to be due"; "Something that is claimed." Case law and common meaning support coverage for costs incurred while responding to a regulatory investigation or enforcement action.

Give Timely Notice to Your Insurers

A company facing a governmental investigation should provide notice to all potentially-implicated insurers (even if only as a precautionary measure) to ensure that it preserves any available insurance rights. The time for notice will ultimately depend on the nature of the policy, its terms, and the level of information available to the company. Moreover, even in instances where the circumstances have yet to rise to the level of a formal "claim," various strategic considerations may weigh for or against providing advance notice of the prospective "claim" to the implicated insurers. Courts frequently recognize the realities of an insured's business by deferring to the insured's judgment. For example, a company may receive subpoenas on a daily basis and are often best positioned to determine whether and when an investigation rises to the level of a "claim."

Providing notice immediately upon learning of a governmental investigation may not result in a loss of coverage, however, providing prompt notice is important to obtaining recovery on the policy and to eliminating at least one area of potential dispute with the insurance company.

Demand A Prompt And Unqualified Defense

A company should insist on a prompt and unqualified defense. The duty to defend and the duty to pay defense costs are among the most valuable benefits of liability insurance. Thus, when an insurance company fails to provide an unqualified defense (i.e., without any reservations), it typically forgoes any right to select defense counsel for the policyholder or to control the defense or settlement of the underlying claim.

Moreover, even in instances when an insurer is purporting to "reserve its rights," it must often provide for the defense of the company (and its directors and officers) so long as any potential for coverage remains under the policy. An insurer's defense obligations arise as soon as the company (or its directors or officers) face allegations that potentially fall within the terms of the insurance, and continue so long as there is any possibility that the coverage will apply.

Engage coverage counsel early

Your company should ensure that your insurance policies are tailored to your needs and risks. Evaluating your insurance coverage and seeking guidance from experienced coverage counsel can ensure that your company has the essential protections in place in the event of a government investigation. Discuss the regulatory risks your company faces with coverage counsel and whether your business needs broader definitional language or additional endorsements. For example, a broader definition of "claim" may provide coverage for investigations that do not result in formal proceedings. Retaining coverage counsel may help your company minimize the impact in the aftermath of a governmental agency regulatory investigation.

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.

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