The Situation: Corporate policyholders, and their individual officers and directors, often incur significant fees and costs when forced to respond to government subpoenas that may require extensive document productions and testimony.When responding to subpoenas, policyholders too often overlook whether their directors' and officers' ("D&O") coverage may cover costs associated with those responses.
The Result: Many courts have held that a subpoena constitutes a "claim" as defined in most traditional D&O insurance policies, and similarly have held that the subpoena need not allege an express "wrongful act" to trigger coverage for defense costs.
Looking Ahead: Policyholders should carefully evaluate both the government subpoena and their specific D&O policy language, as significant favorable legal precedent exists for policyholders seeking such coverage.
No company, officer, or director wants to receive a subpoena from the Department of Justice or a regulator such as the Securities and Exchange Commission. Understandably, individuals and corporate policyholders tend immediately to focus on how to address the subpoena, and how to avoid any future, potentially adverse, developments. There has been an notable increase in the use of subpoenas by various government entities, including U.S. Attorneys' offices, state attorneys general, and government regulators over the past few years.
At the same time, policyholders often fail to consider the availability of potential insurance coverage for the often significant legal fees and expenses involved in responding to the subpoena's demand for documents or appearing before a grand jury. Failing to do so can be unfortunate, as a significant and growing body of case law demonstrates that a subpoena qualifies as a covered "claim" under many D&O liability insurance policies, and that there need not be an express allegation of a "wrongful act" to trigger coverage for related defense costs.
Under many D&O policies, "claim" is broadly defined to include "a written demand for monetary or non-monetary relief." "Wrongful act" is often defined as "any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by" the policyholder. The definition of "loss" in a D&O policy typically includes "the amount which an Insured becomes legally obligated to pay as a result of a Claim, including ... Defense Costs." Significantly, there is also no "subpoena exclusion" in most standard-form D&O policies.
Yet many insurers continue to argue that a subpoena is "not a demand for monetary or non-monetary relief" because it seeks the production of documents, which, according to these insurers, is not a form of "relief." Moreover, these insurers often contend that a subpoena must also expressly identify a "wrongful act"-such as a specific violation of law-committed by the policyholder before the subpoena constitutes a covered "claim."
However, many courts addressing these issues repeatedly have rejected both of these incorrect insurer arguments, confirming instead that a request for the production of documents is a request for "non-monetary relief" and that the subpoena need not include an express allegation of wrongdoing to trigger coverage for defense costs. See, e.g., Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461, 463 (8th Cir. 1990) (a grand jury subpoena compelling the production of documents was a "claim"); Oceans Healthcare, L.L.C. v. Illinois Union Ins. Co., 379 F. Supp. 3d 554, 563 (E.D. Tex. 2019) (a subpoena demanding the production of documents is a "claim," and the subpoena need not allege any wrongdoing to constitute a "claim"); Astellas U.S. Holdings, Inc. v. Starr Indemnity and Liability Co., No. 17-cv-8220, 2018 WL 2431969, at *3 (N.D. Ill. May 30, 2018) (a subpoena was a "claim" because it demanded non-monetary relief, and it need not contain language asserting that the policyholder engaged in wrongful conduct to meet the policy's definition of a "wrongful act"); Syracuse Univ. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 40 Misc. 3d 1205(A), 975 N.Y.S.2d 370 (Sup. Ct.), aff'd, 112 A.D.3d 1379 (2013) (grand jury subpoenas constitute a "claim").
Corporate policyholders should therefore not overlook their valuable D&O policies when they receive subpoenas, as those policies may very well afford coverage for the often-significant defense costs incurred in the face of such government actions.
Two Key Takeaways
- Upon the receipt of a government subpoena directed at the company, or its directors and officers, policyholders should remember to evaluate their D&O policies carefully.
- Corporate policyholders interested in proactively managing their coverage for such risks should also carefully monitor the renewal process for their D&O insurance policies to ensure coverage remains for such exposures.
Originally published March 2021.
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.