Are You Covered When the CFPB Comes Calling? Protecting Insurance Coverage for CFPB Investigation Defense and Settlement Costs

Receiving a Consumer Financial Protection Bureau (CFPB) Civil Investigative Demand or Proposed Action, Response Request (PARR) letter is never good news. However, that news can become significantly worse if you discover, to your surprise, that your response and settlement costs are not covered by the insurance policy you so diligently negotiated and purchased (at great cost). As a recent complaint filed against Ally Financial Inc. and Ally Bank (collectively, Ally) illustrates, financial services companies dealing with the CFPB must ensure that they develop a holistic, integrated response strategy that includes consultation with coverage counsel and careful consideration of the insurance implications of the matter.

Some professional liability insurance policies are designed to cover governmental investigations, such as CFPB investigations. For example, Errors and Omission (E&O) insurance and Directors and Officers (D&O) insurance generally provide coverage for the cost of responding to “government investigations,” “regulatory actions,” or “enforcement actions.” Depending on the specific language of the policy, E&O and D&O policies may also indemnify the insured for funds paid to settle these investigations.

A declaratory judgment action filed by Steadfast Insurance Company on September 29, 2014, against Ally highlights certain issues that can arise in obtaining insurance proceeds to offset the costs associated with a CFPB investigation.

In January 2013, the CFPB sent a PARR letter to Ally raising questions as to whether Ally’s lending practices violated the Equal Credit Opportunity Act (ECOA) by “discriminating on the basis of race and national origin in pricing of loans in its indirect automobile financing business.” Ally responded to the PARR letter in February 2013. In November 2013, the Department of Justice (DOJ) notified Ally that the CFPB made a referral to the DOJ under ECOA. Ally entered into consent orders with the CFPB and the DOJ in December 2013. Among other things, the consent orders required Ally to pay $80 million into a settlement fund. The consent orders also included equitable relief, ordering Ally to cease and desist from any discriminatory loan practices and to comply with monitoring and reporting requirements.

Steadfast issued an excess policy to Ally with a per occurrence (and aggregate) limit of $25 million in excess of $50 million underlying coverage and a $2 million self-insured retention. Among other provisions—beyond the scope of this article—the Steadfast policy required Ally to furnish all information requested by Steadfast and to cooperate with Steadfast’s investigation of the claim for coverage. In addition, the Steadfast policy contained a provision requiring Steadfast’s prior consent to settlement of any claims against Ally.

As alleged in the Steadfast Complaint: on March 18, 2013, Ally’s insurance broker provided notice of the PARR Letter to Steadfast. Steadfast sent a letter to Ally the same day asserting there did not appear to be coverage for the claim and requesting that Ally provide additional information. Ally did not respond to this request. Steadfast sent a second letter to Ally in November 2013 following a telephone call with Ally’s broker. The second letter stated that Steadfast would review any additional documentation that Ally provided. Ally did not respond to this request.

On December 18 and 19, 2013, Ally sent letters to Steadfast advising that it had reached a tentative settlement with the CFPB and the DOJ and asked Steadfast either to approve the settlement or state in writing that it would not assert lack of consent as a defense to coverage. Steadfast provided a letter on December 20, 2013, that it would not assert failure to obtain its consent as a coverage defense. Following negotiations between Ally and Steadfast regarding coverage, Steadfast filed the September 29, 2014, declaratory judgment action seeking a determination that it was not required to indemnify Ally.

Although Steadfast raised a number of arguments in support of its declaratory judgment action, there are two issues this case highlights for any entity seeking insurance coverage for costs in responding to an agency investigation.

1. It is important that the insured promptly notify its insurers and provide any additional information requested by the insurer. Here, Ally’s broker notified Steadfast of the CFPB investigation in March 2013, but—at least as alleged in the Complaint—Ally did not respond to Steadfast’s requests for additional information.
2. An insured must not wait until it has reached a tentative settlement with the CFPB before involving, or at least advising, its insurer of settlement discussions.

In order to preserve an insured’s rights as to potentially applicable insurance policies, the best practice is to work with policyholder coverage counsel to promptly notify insurers upon the receipt of any PARR letter or Civil Investigative Demand. In addition, it is important to work with coverage counsel in responding promptly to requests from insurers to provide additional information. Finally, insurers should be notified of any settlement discussions and given the opportunity to participate in such discussions. Absent such participation, or a letter from the insurer that it will not assert lack of consent to settlement as a coverage defense, such as the letter Ally was able to obtain from Steadfast, the insured may be unable to recover otherwise applicable insurance proceeds – and may even be forced into litigation with its insurer.