When Uncle Sam Comes Calling

Government regulators and agencies are vested with increasingly significant powers to investigate—and potentially prosecute—companies and individuals suspected of wrongdoing. Such investigations are fraught with insurance implications, including, critically, whether and when such an investigation constitutes a claim under an insured’s professional liability policy, thereby triggering a carrier’s defense obligations.

Not surprisingly, the answer depends on the policy’s definition of “claim,” and also varies by jurisdiction. Yet, there are common considerations that often guide courts in making such determinations. While some policies include governmental subpoenas or other investigations in their definition of “claim,” the most common definition is “a demand for monetary or non-monetary relief.”

Voluntary Participation

Imagine HyperMegaNet Inc., a technology firm being investigated by the Securities and Exchange Commission (SEC) for financial improprieties. Mr. Mega, the firm’s chief operating officer, receives an informal request for documents relating to the investigation and, perhaps feeling the heat from the impending investigation, contacts the SEC’s Department of Enforcement and signals a desire to meet. Mr. Mega voluntarily visits the SEC offices and provides information without the issuance of a subpoena. Courts in most jurisdictions would conclude that such voluntary participation in an investigation should not be considered a “claim.”

For example, in the real-world case MusclePharm Corporation v. Liberty Insurance Underwriters Inc., an insured received a letter stating that the SEC was “conducting an inquiry” and “requesting that [the insured] voluntarily produce documents.” The SEC later issued an order directing private investigation and designating officers to take testimony. That order contained a disclaimer stating that “it should be understood that the Commission has not determined whether any of the persons or companies mentioned in the order have committed any of the acts described or have in any way violated the law.”

After a settlement was reached, the insured sought defense costs under its insurance policy, arguing that the order and related subpoenas were non-monetary demands for relief, and, therefore, qualified as a “claim” under the policy. The 10th Circuit, however, upheld the trial court’s ruling denying coverage, explaining that “the insured does not have a covered ‘claim’ without an allegation of wrongdoing against an insured person, and the SEC stated in the...order and the related subpoenas that these documents were not alleging wrongdoing.”

In W.R. Starkey Mortgage LLP v. Chartis Specialty Insurance Co., a Texas District Court held that a mere request for documents—even accompanied by a threat of a subpoena—does not constitute a claim. There, an insured complied with a written request for documents from the Department of Justice (DOJ) and then sought coverage for the costs incurred in complying with that request. Finding that the DOJ’s request did not constitute a “claim,” the court held that a claim required a “demand for something due.” It went on to say that a “request accompanied by a threat of a subpoena is not sufficient to establish a ‘demand for something due,’ since without the subpoena, nothing is actually due.”

Issuance of a Subpoena

Returning to our hypothetical, imagine that the SEC concludes that Mr. Mega is not being forthcoming and, as such, obtains a subpoena for documents. This phase of a government investigation has required courts to consider the difficult question of whether the issuance of a subpoena constitutes a claim. Here, courts in different jurisdictions have varied in their answers.

For example, in Employers’ Fire Insurance Company v. Promedica Health Systems Inc., the 6th Circuit concluded that subpoenas issued by the Federal Trade Commission (FTC) seeking information related to its investigation into whether an insured health system’s acquisition of a hospital violated antitrust laws did not demand relief and, therefore, did not constitute a “claim.” What’s more, because the subpoenas did not seek to redress any alleged wrong, they were merely a part of the FTC investigation, which again suggested that they did not comprise a “claim.”

Recently, the U.S. District Court for the Eastern District of Texas took a contrary view. In Oceans Healthcare LLC v. Illinois Union Insurance Company, a health care provider brought an action against an insurer for costs incurred when the provider received a Department of Health and Human Services subpoena demanding documents relating to an investigation into possible False Claims Act violations committed by the provider. Distinguishing this fact pattern from Starkey Mortgage, the Oceans Healthcare court held that compliance with the subpoena was required by law and was “undoubtedly a demand for something due....” The Oceans Healthcare court held that a “subpoena is determinative as to whether a request is a demand for something due,” ruling that the subpoena was a claim for a wrongful act.

Impanelment of a Grand Jury

Returning one final time to the quandary of Mr. Mega, imagine that the SEC concludes that he was an active participant in the financial improprieties, and a grand jury is impaneled to examine evidence and to determine if he should be indicted. Here, absent unusual circumstances, most jurisdictions are in agreement that this constitutes a “claim” sufficient to trigger coverage.

In Polychron v. Crum & Forster Insurance Company, the 8th Circuit held that legal fees incurred in defending a bank officer during a grand jury investigation into his activities constituted a “claim,” thereby triggering coverage under a D&O liability policy. In so holding, the 8th Circuit noted that the grand jury investigation amounted to an allegation of wrongdoing against the bank officer, and that the insurer’s “characterization of the grand jury investigation as mere requests for information and an explanation underestimates the seriousness of a probe. As later events proved, [the bank officer] was the target of the investigation.”

Likewise, in Li v. Certain Underwriters at Lloyd’s, London, the United States District Court for the Eastern District of New York held that an indictment identifying the insured, a director of an international soccer association, as a target of an inquiry into an international racketeering conspiracy triggered the insurer’s obligation to pay his investigative costs.

In determining whether a government investigation constitutes a claim that triggers professional liability coverage, policy language and jurisdiction matter. However, other factors such as the stage of the investigation and whether informal participation is being requested or formal participation is being demanded must also be considered.

Additionally, whether the insured is the target of the investigation and wrongdoing is specifically alleged are important considerations. Evaluating these factors will go a long way toward determining when a government investigation crosses that line from mere inquiry to a claim, triggering a carrier’s duty to defend or protect its insured.