Insurance Coverage for Government Investigations: Tender Claims Early

Bradley Intelligence Report

Client Alert


Any company, particularly if conducting business is a highly regulated industry, risks being served with a subpoena or a civil investigative demand (collectively, “CID”) from a governmental agency or entity. As set forth below, the company may have insurance coverage available to cover the costs associated with responding to the CID. More importantly, however, failure to provide prompt notice to insurance carriers could preclude coverage for any subsequent litigation or enforcement proceeding related to the CID. Prompt notice of the CID to the company’s directors and officers’ (D&O) insurer is critical.

D&O Policies and CID

D&O policies provide financial protection through liability coverage, including both defense and indemnity, to the directors and officers of a company for claims asserted against those directors and officers arising from the management of the company. Unlike other forms of insurance, such as property or general liability policies, in which insurers utilize standardized forms, D&O coverage can vary significantly from one insurer to another. 

The typical D&O policy provides insurance coverage under three different insuring agreements, commonly known as Side A, Side B, and Side C coverage. Side A provides “direct” or personal liability coverage for individual directors and officers where the company cannot legally provide a defense or indemnify loss (where such indemnity is prohibited by state law) or where the company is financially unable to do so. Side B indirectly covers the individual directors and officers of the company by reimbursing the company for defense or indemnity payments that the company has made or is required to make on behalf of its directors and officers. Side C, which is also known as “entity coverage,” provides coverage for claims against the company itself. 

The insuring agreement of most D&O policies will provide coverage for “loss” that is incurred as a result of a “claim” made for a “wrongful act.” While the specific language of D&O policies varies from one insurer to another, the term “claim” typically refers to an assertion of a legal right, a demand for payment by a third party against the insured, or even a demand for non-monetary relief. The term “claim” could also be defined to include administrative and regulatory proceedings, criminal investigations, or civil investigative demands by regulators. In short, depending on the language of the CID itself, as well as the definition of “claim” in a D&O policy, a CID could constitute a claim.

Delayed Notification Risks Denial of Coverage

If a CID could constitute a claim as defined in the D&O policy, prompt notice is critical because failure to provide notice timely could defeat coverage. D&O policies are typically written on a claims-made basis. Claims-made policies, sometimes called claims made and reported policies, provide coverage for claims that occur (and are reported) to the insurer while the policy is in force.  Failure to report a claim to the carrier during the policy period, or any applicable extended reporting period, could be an absolute bar to coverage.

Another reason for prompt notice to a D&O carrier of any CID, even if the insured does not think the CID qualifies as a claim or the anticipated costs to the insured in responding to the CID does not require insurance proceeds, is a concept within D&O policies of “related claims.” Most D&O policies also contain “related claims” or “interrelated wrongful acts” provisions. These provisions are broadly worded and will provide that all related wrongful acts will be considered a single claim.  For example, the policy definition of “related claims” or “related wrongful acts” could be “claims that have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations, events or transactions.” Where two or more claims satisfy this “related claims” definition, then they are usually deemed to be a single claim first made at the time of the earlier claim.

For example, assume a company has a D&O policy for successive one-year policy periods beginning June 1, 2020.  The company receives a CID on December 1, 2020, responds to the CID and does not provide notice to its D&O insurer. The D&O policy renews on June 1, 2021, for one year and then again on June 1, 2022, for another year. In September 2022, the insured company is named as a defendant in an enforcement action and is then named as a defendant in civil lawsuit in March 2023 – both actions involving the same conduct that was at issue in the CID. The company tenders both the enforcement action and the civil lawsuit to its insurer, which denies the claims.

The insurer asserts that under the definition of “claim” in the hypothetical D&O policy, the CID constituted a claim, which should have been reported but was not reported to the carrier during the June 1, 2020, to June 1, 2021, policy. Because the claim was not made and reported during that policy period, there was no coverage for the CID. Furthermore, under the “related claims” provision of this hypothetical D&O policy, the CID, enforcement action, and civil lawsuit were “related claims” that were deemed to be a single claim first made at the time of the CID. Since there was no coverage for the CID – because it was never reported – the insurer asserts the “related claims” provision precludes coverage for both the enforcement action and the civil lawsuit.

When any company receives a CID or government-issued subpoena, the company should consult with insurance coverage counsel and an experienced broker to evaluate potential coverage under any D&O policy and provide prompt notice of the CID to the D&O insurer.