Government investigations by SEC, DOJ, and state attorney generals are a significant source of exposure for companies and their directors and officers. Companies can spend millions of dollars responding to a government subpoena or investigative demand. The broadly worded demands for information or testimony typically require extensive searches through mountains of paper documents and electronically stored information (“ESI”).

As investigation defense costs rise, the question inevitably follows: Will the company’s D&O or professional liability insurance cover the costs of responding to a formal investigative order, civil investigative demand or subpoena? The answer to this question is not always clear-cut. Given the stakes, insurers and policyholders frequently litigate this issue, with courts across the country reaching different conclusions depending on the unique terms, definitions, and conditions of the policies and the type of investigation at issue. A recent decision in Delaware addressing insurance coverage for the costs of responding to a civil investigative demand provides helpful guidance for policyholders seeking coverage for these costs.

In Guaranteed Rate, Inc. v. Ace Am. Ins. Co., No. N20C-04-268 MMJ CCLD (Del. Super. Ct. Aug. 18, 2021), appeal refused, 266 A.3d 212 (Del. 2021), the Delaware Superior Court considered whether a civil investigative demand – issued by the U.S. Attorney’s Office for the Northern District of New York and the U.S. Department of Justice – qualified as a “Claim” as required to trigger coverage under the policyholder’s Private Company Management Liability Policy. The civil investigative demand was issued pursuant to the False Claims Act “in the course of an investigation to determine whether there is or has been a violation of 31 U.S.C. § 3729.”

As is typical in these disputes, the insurer denied coverage arguing the civil investigative demand did not qualify as a “Claim,” which the policy defined to include “a civil, administrative or regulatory investigation against the Insured[.]”  Citing to Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., No. N18C-12-074 MMJ CCLD (Del. Super. Ct. June 24, 2019) – in which the Superior Court found coverage for a civil investigative demand under a professional liability policy – the Guaranteed Rate court held that the civil investigative demand fell within the definition of “Claim.” Recognizing that an insurer’s duty to pay defense costs “must be construed broadly, and in favor of coverage” the court explained that “[f]or purposes of determining coverage, there is no distinction between the investigation of, or actually alleging, an unlawful act.”

The Delaware court also rejected the insurer’s late notice argument. Despite receiving notice of the civil investigative demand twelve days after it was served, the insurer argued that notice was untimely because the policyholder did not request coverage prior to disposition of the investigation by settlement. The court disagreed, finding that the civil investigative demand and related investigation constituted a Claim that triggered the duty to advance defense costs under the policy when the policyholder provided notice. The decision in Guaranteed Rate was the subject of an interlocutory appeal, which was refused by the Supreme Court of Delaware on November 19, 2021.

When an investigation is commenced by a government entity, whether by service of a subpoena or by less formal means, a company should immediately determine whether insurance coverage might be available to pay for the significant defense costs that may be incurred in connection with the investigation. Given that coverage disputes for investigations turn on the wording of the particular policy at issue, coverage is often won or lost when a policy is negotiated and placed. Coverage counsel and brokers can help identify terms that may be used to limit entity investigation coverage and assist policyholders with negotiating policy language revisions and with exploring alternative carriers or captive insurers that will expressly provide coverage for these types of risks.