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In the Government’s Crosshairs? Government Investigations and Your D&O Coverage

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In the Government’s Crosshairs? Government Investigations and Your D&O Coverage. Introductions. MODERATOR: Nancy D. Adams, Esq., CPCU, Partner, Mintz , Levin, Cohn, Ferris, Glovsky and Popeo PC PANELISTS : Kieran Hughes, JD, Vice President, Financial Lines Claims, Chartis Insurance

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  • Nancy D. Adams, Esq., CPCU, Partner, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC


  • Kieran Hughes, JD, Vice President, Financial Lines Claims, Chartis Insurance
  • Mary E. McCutcheon, Esq., Partner, Farnella Braun
  • Carl E. Metzger, Esq., Partner, Goodwin Proctor LLP
  • Susan Miner, MS, Senior Vice President & Partner, Woodruff Sawyer & Company
  • The Anatomy of an SEC Investigation
  • Coverage Issues Arising from Investigations
  • The D&O Policy and Investigations Coverage
  • The Legal Authority
  • New Investigation Products

Polling Question:

  • Which category do you fall into?:
    • Insurer
    • Broker
    • Attorney
    • In-House Counsel
    • Risk Manager
    • Other
anatomy of an sec investigation in three easy steps
Anatomy of an SECInvestigation in Three Easy Steps
  • Types of SEC Investigations
  • Types of SEC Enforcement Proceedings
  • Key Issues in SEC Enforcement Cases
types of sec investigations
Types of SEC Investigations
  • Inspections of Regulated Firms
  • Preliminary Inquiries
  • Informal Investigations
  • Formal Investigations
  • Criminal Referrals and Investigations
types of sec enforcement proceedings
Types of SECEnforcement Proceedings
  • Injunctive Actions
  • Administrative Proceedings
  • Civil Claims Brought in Federal Court
  • Criminal Referrals and Actions
key issues in sec enforcement practice
Key Issues in SECEnforcement Practice
  • Self-reporting to the government
  • Cooperation with the government
  • Legal representation of interested parties
  • Selective waiver (or not) of the attorney-client privilege
  • Available sanctions
  • Settlement, including amounts characterized as fines, penalties or disgorgement
  • “Neither admit nor deny” issues

Polling Question:

  • On behalf of a client, have you ever been involved in an investigation?:
    • Yes
    • No
  • If yes, was the investigation:
    • Informal
    • Formal
coverage issues
Coverage Issues
  • When is coverage triggered for the individual D&O?
    • Informal inquiry
    • Company internal investigation
    • Subpoena
    • Formal investigation
    • Wells notice
    • Complaint
  • When is coverage triggered for the Company?
  • Is the Company insured for the costs of its internal investigation?
  • Can pre-claim work be covered if it benefits defense of a later-filed claim?
  • Notice issues - traps for the unwary


Does Definition of “Claim” Include Investigation?

  • Expressly or by implication?
  • Against individuals (named)?
  • Against company?
  • What types of investigation are covered?
    • Internal v. external
    • How initiated
  • Does investigation “allege” a “Wrongful Act”?
  • What happens if “Claim” made but not noticed?
d o coverage historic standard for regulatory investigations
D&O Coverage: Historic Standardfor Regulatory Investigations
  • Traditional D&O policies only cover individuals for formalinvestigative costs, not the entity
  • Some policies will cover the entity if named & maintained throughout investigation with an Insured (doesn’t happen!)
  • Definition of Claim
    • Formal regulatory investigations against individual Ds and Os, but only if the D or O is specifically identified as the target of the formal investigation, or when a subpoena is served on the individual
    • “Claim” includes criminal investigations (once D or O is indicted)
    • Dedicated Broad Form A-side policies sometimes cover informal investigation when the company can’t indemnify
d o coverage current standard includes pre claim inquiry
D&O Coverage: Current Standard Includes Pre-Claim Inquiry
  • What is a Pre-Claim Inquiry?
    • Request for an Insured Person to (a) appear at a meeting or interview; or (b) produce documents that concerns the business of the Organization or the Insured Person’s insured capacities but only if the request came from:
      • Any Enforcement Body – federal, state, local or foreign law enforcement authority or other governmental investigative authority or the enforcement unit of any securities or commodities exchange or other self-regulatory organization
      • The Organization (investigating shareholder derivative demands)
d o coverage current standard includes pre claim inquiry1
D&O Coverage: Current Standard Includes Pre-Claim Inquiry
  • What Pre-Claim costs are covered?
    • Reasonable and necessary fees, costs and expenses incurred by an Insured Person solely in connection with his/her preparation for and response to a Pre-Claim Inquiry
  • What is not covered?
    • Document Production. Note some insurers will add an endorsement to allow for costs associated with producing documents that are in the possession of the Insured Person
enhanced d o policies might be worth additional premium
Enhanced D&O Policies Might beWorth Additional Premium
  • Enforcement Body is Broadly Defined
    • Not limited to the SEC, any governmental investigative authority (EPA, FDA)
    • Note- routine regulatory or internal supervision, inspection, compliance, review, production or audit conduction in an Enforcement Body’s normal review or compliance process ≠ a Pre-Claim Inquiry
    • Review your language carefully, particularly as to requirements for a Wrongful Act or notice
    • Consider new triggers such as search warrant
enhanced d o policies might be worth additional premium1
Enhanced D&O Policies Might be Worth Additional Premium
  • Dodd-Frank whistleblower provisions may change the landscape – could lead to heightened activity and potential earlier identification of Insured Person targets of the SEC

Polling Question:

  • For those of you who have been involved in an investigation, did the insurer pay the insured’s defense expenses?
    • Yes, no reservation
    • Yes, under a reservation of rights
    • No
the legal authority
The Legal Authority …

Each side can cite to a “supporting” case – but look at the policy language

  • MBIA Inc. v. Fed. Ins. Co., 2011 U.S. App. LEXIS 13402 (2d. Cir. July 1, 2011)
    • Coverage for investigation costs triggered by State A.G. subpoena, oral request by SEC, SLC investigation.
    • Policy covered “formal or informal investigation order” and “similar documents.”
the legal authority1
The Legal Authority …
  • Office Depot, Inc. v. Nat’l Union Fire Ins. Co. 734 F.Supp.2d 1304 (S.D. Fla. 2010) aff’d 2011 WL 4840951 (11th Cir. Oct. 14, 2011) (unpublished)
    • No coverage for costs incurred by Company in voluntarily responding to SEC investigation or for internal investigation costs.
    • Policy only covered proceedings also maintained against an Insured Person.
other cases worth considering
Other Cases Worth Considering
  • National Stock Exchange v. Federal Ins. Co., 2007 WL 1030293 (N.D. Ill. 2007)
    • An investigation “alleges” a “Wrongful Act.”
  • Hansen Natural Corp. v. St. Paul Mercury Ins. Co., CV 08-5067-VBF (C.D. Cal. 2009)
    • Costs to respond to SEC request for documents not a “Claim.”
other cases cont d
Other Cases (cont’d)
  • Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co. 2008 WL 4613170 (S.D.N.Y.)
    • No coverage for the Company based on an ongoing federal grand jury investigation where the Policy expressly required “the return of an indictment, filing of a notice of charges or similar document” as a condition of coverage for criminal proceedings.  




many thanks to
Many thanks to …
  • Nancy Adams
  • Kieran Hughes
  • Mary McCutcheon
  • Carl Metzger
  • Susan Miner