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According to both anecdotal and empirical evidence, the frequency of both internal and external corporate investigations has increased significantly over the past decade.  However, the insurance market is only beginning to catch up.  As a result, businesses (and their officers and directors) are often ill-prepared for the costs associated with such investigations.  Many assume that, if a crisis implicating such an investigation occurs, their insurance will cover the costs.  However, such coverage is far from a certainty.

I. External Investigations.

Although a handful of entity and director and officer policies specifically include external regulatory or administrative investigations (such as an SEC investigation) within the definition of a covered “claim,” most policies do not.   However, such investigations are also rarely the subject of an express exclusion.  Thus, an administrative or regulatory investigation can be a covered event if it can be fairly said to fit within the policy's definition of "claim."  

In most cases, in order to be a "claim" the investigation must be (i) a “proceeding,” (including a regulatory proceeding) (ii) “for monetary, non-monetary or injunctive relief…” and (iii) “commenced by ... service of complaint or similar pleading ... or receipt or filing of notice of charges."  Dealing with each of these points in turn:

  • With respect to the requirement that the claim be a “proceeding,” insurers generally look to formality to determine whether a “proceeding” has been initiated. The conventional wisdom applied by most insurers (and courts) is that an informal investigation is not a “proceeding,” but a “formal investigation” (for instance, an SEC investigation premised upon an order by the Commission) is a “proceeding.” 
  • With respect to the requirement that the proceeding be “for ... relief,” there is some split between courts as to whether a regulatory investigation actually seeks “relief” of any kind.  Thus, this question can be both policy and jurisdiction specific.
  • With respect to the requirement that the proceeding be “commenced by ... service of complaint or similar pleading ... or receipt or filing of notice of charges," many carriers argue that most investigation-related correspondence that does not imply a specific charge (e.g., a subpoena, information request, etc.) does not meet this standard. 
Thus, obtaining coverage for a regulatory or administrative investigation under a standard policy can be an uphill battle. 

Of course, every claim is different.  However, in most cases, coverage can be maximized by: (i) notifying the carrier early, in order to assure that all rights are preserved; and (ii) consulting counsel early, allowing time for a complete analysis of the considerations and elements listed above. In addition to crafting arguments regarding the definition of "claim," counsel may also be able to tie the investigation to some un-asserted (but forthcoming) claim, such that the investigation costs should be covered under other legal or equitable principles.

Counsel's efforts notwithstanding, given the typical policy language and the state of the law, obtaining such coverage for an external investigation under a standard policy can be difficult.  As a result, policies can now be purchased that specifically provide coverage for most forms of external investigations or inquiries.  For instance, one recent offering provides limited coverage for any "verifiable request for an insured person … to appear at a meeting or interview or produce documents."  Another offering provides considerably higher limits, but enumerates the covered types of investigations.  The coverage under such policies can vary greatly, including vastly different trigger points, conditions, sub-limits, effects on other coverages, retentions and (of course) premiums. 

II. Internal Investigations.

If coverage exists for an external regulatory or administrative investigation, it would seem reasonable that the costs necessitated by any contemporaneous internal investigation should be covered under that same umbrella.  However, where an internal investigation pre-dates any formal action or investigation, coverage is often difficult to obtain.  After all, such an internal investigation is initiated by the company itself and there are often no obvious guideposts or mechanisms indicating whether such an investigation was reasonable or necessary.  Thus, an internal investigation that is not directly tethered to some  suit or external investigation will rarely meet a policy's definition of a covered "claim."

Still, when a claim is anticipated, a competently handled internal investigation may diminish or eliminate the costs and scope of any regulatory investigation that follows and can help preserve testimony or evidence when a third-party suit is anticipated.   Thus, in most cases, a liability insurer will benefit from a competently handled internal investigation. 

In light of this benefit, there are some equitable arguments that can be advanced to implicate such coverage.  For instance, such costs might be reimbursable as mitigation costs.  Similarly, there is a more general notion that equity requires coverage for any costs incurred for the benefit of the insurer.  However, it can be difficult to succeed on such equitable arguments.  Moreover, in many cases, litigation against the insurer (seeking to establish coverage) is not an option, as the insured does not want the internal investigation to be revealed in public court filings.

In light of the foregoing, the cleanest path to coverage for an internal investigation is often inducing your carrier to request or agree to one.  To that end, the keys to obtaining such an agreement are: (i) providing an early notice of circumstances, in which the insurer's potential liability (i.e., their worst-case scenario) is highlighted; and (ii) underscoring the insurer's own interest in diminishing that liability by participating in (and funding) a thorough and competent pre-claim internal investigation.
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