Government investigations of businesses are on the rise, from the state to the federal level. These investigations range from subpoenas and demand letters to litigation that may be instigated by the government against businesses. For example, the U.S. Department of Justice has initiated False Claims Act (FCA) suits, or has prosecuted the qui tam actions initiated by private parties, against nearly every industry, including the medical, defense, construction, energy, information technology, and financial services sectors. Recently announced probes into the foreign business practices of several major U.S. corporations highlight the government's vigorous use of Foreign Corrupt Practices Act (FCPA) over the last decade. In 2010, FCPA enforcement actions jumped a staggering 85 percent. Responding to subpoenas and/or government demand letters can be costly, and these initial investigations may prove to be harbingers of future lawsuits, whether initiated by the government or private parties.
The potential costs and significant liabilities that may follow these investigations make it critical that businesses preserve and pursue the insurance coverage that may be available. Here are our top 10 tips for analyzing and navigating the pursuit of coverage for such investigations.
1. CONDUCT A FRESH REVIEW OF POLICIES ANNUALLY
The goal of an annual policy review (or audit) is to evaluate the business's insurance policies, and the options available in the marketplace, to place the business in the most advantageous position possible to recover insurance should a claim or loss arise. Once an investigation begins, businesses turn to the insurance policies they have already purchased. Insurers frequently respond with letters asserting, rightly or wrongly, that the protections that the business thought it had are not actually provided by the insurance the business bought. No business can predict all of the disputes that may arise with its insurance provider. A business, however, can take steps when purchasing insurance to anticipate the types of claims it may assert and investigate the options insurers offer that may afford more or less protection. Also, businesses should use the annual review to look for gaps in insurance coverage, and analyze new products and options being offered in the market.
2. ANALYZE ALL POTENTIALLY AVAILABLE INSURANCE POLICIES
The broad scope of investigations, and corresponding types of government litigation, may implicate several types of insurance policies, including Comprehensive General Liability (CGL), Errors & Omissions (E&O), Professional Liability, Directors' and Officers' (D&O), Crime/Fidelity Insurance, and Employment Practices Liability (EPL) policies. Do not overlook potential sources of recovery simply because the conventional wisdom says that those types of policies "aren't meant for these types of claims."
3. PROVIDE PROMPT NOTICE OF GOVERNMENT INQUIRIES OR INVESTIGATIONS
Insurance policies typically require a business to notify its insurer when it becomes aware of the likelihood of a claim implicating the insurance. Insurers frequently dispute whether an investigation meets the definition of a "claim" under a D&O policy, or seeks relief that is compensable under other insurance policies, which impacts whether and when notice is due.
Once a business is aware of an investigation, it should provide notice to preserve its insurance recovery rights. Do not wait to evaluate whether the insurer or a court will ultimately determine that notice was due.
Businesses should understand whether they have "occurrence" or "claims made" policies, as differences may impact the notice required. A delay in providing notice, however, will not necessarily result in a loss of coverage. Nonetheless, prompt or even precautionary notice should eliminate at least one potential area of dispute.
Businesses should tread lightly when dealing with notice in the context of an FCA qui tam action that is under seal. Although the government may share portions of a sealed action, the seal may preclude disclosure of any facts to a third party, including an insurer.
4. BE CAREFUL IN YOUR COMMUNICATIONS BECAUSE THEY MAY NOT BE PRIVILEGED
Communications with an insurer concerning an investigation are not necessarily privileged. An insurer's reservation of rights or denial of a claim frequently eliminates or compromises the potential for privilege. When insurers agree to defend or pay for at least a portion of the defense, businesses should consider formalizing the joint recognition of privilege in writing.
5. TREAT A RESERVATION OF RIGHTS OR INITIAL DENIAL AS THE BEGINNING OF YOUR INSURANCE RECOVERY, NOT THE END
The reservation of rights or initial denial should be viewed as the first step in recovery under an insurance policy. To preserve its rights, the insurer is required to state every basis on which it believes there might not be coverage. The letter will help an insured business focus on the issues that must be resolved to obtain insurance. How the business responds must be informed by the particular facts presented by the claim, including the scope of the potential investigation and liability, the basis or bases for the reservation of rights or denial, whether the insurer has recognized its defense or other obligations subject to the reservation, the applicable law, and the likelihood of litigation with the insurer.
Some disputes can be resolved by showing the insurer that its factual or legal assumptions are incorrect. Other disputes appear destined for litigation. The challenge for an insured, is to respond in a way that addresses the specific concerns raised by the insurer, and enhances the negotiating stance and position if the matter results in litigation.
6. DEMAND AN IMMEDIATE DEFENSE
The duty to defend and/or duty to contemporaneously pay defense costs as incurred are among the most valuable benefits provided by liability insurance. These duties protect businesses from shouldering the brunt of legal fees to defend against liabilities. Even if an insurer has reserved its rights, it should nonetheless recognize its defense obligation under its policy, while it seeks clarification of its insurance obligations. The insurer's defense obligations arise as soon as the insured business faces allegations that potentially fall within the insurance coverage it purchased, and the obligation continues while there is a potential for the coverage to apply.
7. CONSIDER WHETHER YOUR DEFENSE OF THE INVESTIGATION MAY BE RELATED TO YOUR DEFENSE OF OTHER LIABILITIES
In the context of D&O insurance, courts have recognized the principle that the defense of other claims not covered under the insurance policy may nonetheless fall within the coverage because the costs are "reasonably related" to the defense of the covered claim. The principle recognizes the reality that the defense of covered liabilities may involve coordination and defense of satellite liabilities.
The relationship between the investigation and other liabilities may also be significant based on "related act" provisions in insurance policies, and thus must be considered. Related act provisions may impact whether a single policy limit or retention or multiple policy limits or retentions apply for the defense and liabilities, and may dictate which policy must respond to the investigation if there is the potential for multiple years of policies to apply.
8. DO NOT ACCEPT INSURERS' CHARACTERIZATIONS THAT A GOVERNMENT DEMAND IS AN INFORMAL REQUEST
Insurers often attempt to deny businesses the benefits of liability insurance by arguing that a government inquiry or demand does not rise to the level of a covered claim, or does not seek compensatory damages of the type insured under the policy. A government demand, even if considered informal by an insurer, is by nature compulsory because of the consequences, liabilities, and penalties that a business faces by failing to adequately respond. Businesses should reject insurers' attempts to minimize the significance of government action, and instead focus on the reality, recognized by various courts, that the common understanding of a government demand as compulsory brings it within the contours of insurance protections.
9. DEMAND COVERAGE FOR ALLEGATIONS OF INTENTIONAL WRONGDOING
Allegations of intentional misconduct are generally intertwined with allegations of negligence and other misconduct that clearly fall within liability coverage. Moreover, liability policies frequently provide coverage for alleged intentional misconduct when there is no final judgment or adjudication of wrongdoing. Also, the actions of individuals engaged in intentional misconduct should not eliminate coverage for an innocent insured, and actions by officers or employees, including high-level officers, may not preclude coverage for the corporation itself..
10. DO NOT GIVE INSURERS EXCUSES TO AVOID PAYING SETTLEMENTS
Insist that defending insurers are active in the settlement process to avoid later second guessing. Be mindful of an underlying settlement's impact on coverage, and ensure that covered settlements are not mistakenly swept into exclusions due to mis-characterizations. Insurers may after the fact attempt to recast settlement payments to invoke exclusions or public policy prohibitions on coverage for disgorgement or restitution. The facts of potential liability, rather than labels, should control the characterization of payments, and these exclusions and public policy considerations often do not sweep as broadly as insurers contend. However, care should be taken in drafting the settlement agreement to avoid any potential misunderstanding.
Originally published in the Association of Corporate Counsel (ACC), August 2012
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.