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The Defense Line: A Publication From The Maryland Defense Counsel, Inc.

Insurance Coverage for Government Investigations: What Constitutes a “Claim?”

Joseph L. BeaversLee Crofton DouthittJoseph L. Beavers & Lee Crofton Douthitt
Government investigations directed at private business entities are becoming increasingly common in a variety of industries—from FDIC investigations in the banking industry to FDA investigations in the pharmaceutical industry.1 Such investigations, whether initiated by state or federal regulatory bodies, are often very costly.2 Targeted entities typically retain outside counsel and incur substantial costs locating and producing documents and electronically-stored information.3 Fortunately, many businesses have (or can purchase) directors’ and officers’ (“D&O”) or other liability insurance policies that potentially cover some of these costs.4 Accordingly, once a target letter, subpoena, or other investigatory notice is received, the targeted company should review its insurance coverage to determine whether a claim should be made under its policy(ies).5

The scope of coverage under D&O policies varies significantly from policy to policy, and whether a government investigation is covered often depends on whether, as a threshold matter, the investigation constitutes a “claim” as that term is defined in a given policy.6 This issue has been considered in a number of jurisdictions, including the United States District Court for the District of Maryland, and the analysis is always heavily fact-dependent.7 As set forth below, however, policyholders have recently been successful in securing coverage for a variety of different investigations.8 Targeted entities should always conduct a detailed analysis of their D&O and other potentially applicable policies when faced with any costs arising from a government investigation.9

Types and Methods of Investigations that May Trigger D&O Policy Coverage

While the recent financial crisis has certainly triggered an increase in government investigations into corporate wrongdoing, these types of government investigations have taken place for some time now. Perhaps more obvious at the federal level, the Security Exchange Commission (SEC), the Federal Bureau of Investigation (FBI), the Federal Trade Commission (FTC), the Federal Deposit Insurance Corporation (FDIC), and the Department of Justice (DOJ) all have the capacity to investigate private entities.10 These government investigators could look into practices ranging from compliance with corporate lending laws, to possible antitrust violations, to government contract performance.11

For example, the SEC formed a working group in 2007 to investigate whether companies involved in subprime lending violated federal securities laws for failing to disclose information to investors.12 The DOJ has closely monitored government contract bidding and compliance in the wake of the recession and a decreased military presence in Iraq and Afghanistan, leading to an increased number of companies banned from contracting with the government in recent years.13 Notably, BP was recently banned from doing business with the United States over its “lack of business integrity” in the 2010 Deepwater Horizon oil spill.14

Possibly less anticipated are investigations led by state governments or agencies, such as states’ attorney’s general offices or consumer protection divisions.15 These investigations may look to determine whether there have been violations of similar state corporate disclosure or contract compliance requirements.16

Regardless of whether the government investigation begins at the federal or state level, the investigation may initially take many forms. It could begin with a target letter, indicating the government’s intent to pursue an investigation of the company, or a subpoena for records or testimony.17 In fact, the government could serve these subpoenas on companies which are not the target of the government’s investigation but whose responses may be helpful to the investigation.18 As a result, a non-targeted company could be forced to incur significant costs to comply with a government investigation of a targeted company.

As these investigations progress, they may take the form of formal investigations, grand jury indictments, lawsuits, and/or fines.19 While more formal investigations are more likely covered by a D&O policy, coverage often depends upon the facts and circumstances regarding the investigation and the specific language of the policy.20 The critical question is almost always whether the investigation falls within the D&O policy’s definition of “claim,” which may be broadly or narrowly defined depending on the specific policy.

Potential D&O Coverage for Government Investigations

In the 1980s and 1990s, very few D&O policies defined the term “claim.”21 While this is no longer the case, should a D&O policy not define the term “claim,” courts have held the term has no specific meaning within the insurance industry and, thus, is to be interpreted according to its plain meaning.22 According to the Merriam-Webster Dictionary, a “claim” is “a demand for something due or believed to be due.”23 Meanwhile, Black’s Law Dictionary defines a “claim” as “(1) the aggregate of operative facts giving rise to a right enforceable by a court; (2) the assertion of an existing right; any right to payment or to an equitable remedy, even if contingent or provisional; (3) a demand for money, property, or a legal remedy to which one asserts a right.”24

Though courts are increasingly confronted with the task of interpreting D&O policies that define the term “claim,”25 not all policies define the term consistently.26 Given that government investigations can take many forms and that the term “claim” is not given a uniform definition, the question of whether the costs of responding to an investigation are covered is a concern to companies.27 Thus, the analyses conducted by courts interpreting D&O policies are instructive with respect to how courts deal with these issues and how companies can best prepare for coverage disputes.28

Recently, in MBIA Inc. v. Federal Ins. Co., the Second Circuit decided a major D&O policy coverage case.29 In connection with several of its financial products, financial guarantees, and other structured financial obligations, MBIA came under investigation by the SEC and the New York Attorney General (hereinafter, “NYAG”).30 The investigation began in March 2001 when the SEC issued an order directing some MBIA officers to provide testimony concerning insurance products. Formal subpoenas were not issued by the SEC or the NYAG until December of 2004. The SEC and the NYAG issued more subpoenas in 2005, before allowing MBIA to voluntarily comply with informal document requests. In August of 2005, the SEC and the NYAG informed MBIA that they would initiate formal proceedings against MBIA for securities-law violations. In October of 2007, MBIA executed an offer of settlement, which the SEC accepted in January of 2007. Around the same time, the NYAG settled its investigation.

The cost to respond to these investigations exceeded $23 million. MBIA sought reimbursement pursuant to its D&O policies for the costs associated with the subpoenas, the investigations, an independent consultant’s investigation required under the settlements, and two derivative actions filed by MBIA’s shareholders. MBIA’s D&O policy provided coverage for “Securities Claims,” which were defined as “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document.” The insurers disputed whether subpoenas, informal requests, and derivative actions taken by individuals who were not “insureds” were included in the scope of coverage.

The district court held that the subpoenas triggered a claim under the policy, finding that a subpoena qualifies as a formal or informal investigation and, alternatively, the policy’s use of the words “or similar document” included subpoenas where the policy did not define “or similar document.” Additionally, the district court held that the informal investigations at issue were sufficiently related to other formal investigations as to fit within the range of coverage provided by the policy. Finally, the district court held that the defense of the derivative actions included the policyholder or, alternatively, the derivative actions included the special litigation committee composed “exclusively of members of [MBIA’s] Board of Directors.” In its only finding against the policyholder, the district court held that the costs associated with the independent consultant were not covered under the policy because MBIA did not notify the insurer of the independent consultant so as to give the insurer the opportunity to “effectively associate” with the policyholder in the settlement of the claim as required by the language of the policy.

The Second Circuit affirmed the conclusions of the district court that favored the policyholder, albeit through a different course of analysis in some instances.31 In agreeing that a subpoena was a formal or informal investigative order, the Second Circuit rejected the view that a subpoena is only “a mere discovery device.” Most importantly, the Second Circuit found that the expenses associated with the independent consultant were covered claims, reversing the district court, believing that MBIA had satisfied the “right to associate” clause of the policy by giving the insurer “a single invitation to associate with adequate information about the claim under consideration for settlement.” Importantly, an insured need not “return to the nonparticipating insurer each time negotiations about the same claim” take a different course. In finding coverage for each of MBIA’s claims under the D&O policy, the analyses of the Second Circuit and the district court are instructive in determining how courts may view these cases in the future to reach a pro-policyholder result.

The United States District Court for the District of Maryland has also reached a pro-policyholder result in interpreting a similar definition of “claim.” In ACE American Insurance Co. v. Ascend One Corp., the court found that a subpoena and investigative demand for documents constituted a claim to trigger coverage.32 The court based its decision on the rationale that the subpoena and investigative demand for documents fit within the policy’s definition of claim as “a civil, administrative, or regulatory investigation commenced by the filing of a notice of charges, investigative order or similar document.” In this case, the court looked beyond the four corners of the policy and found that extrinsic evidence, such as the caption of the subpoena, demonstrated the purpose of the subpoena and investigative demand was the investigation of potential violations of the Maryland Consumer Protection Act. The court reasoned that the caption evidenced a form of notice of charges so as to fall within the policy’s definition of claim. In view of this, the court found that the subpoena triggered coverage under the policy. Both MBIA and ACE Am. show courts finding that the cost of responding to investigative demands, such as subpoenas, or informal investigations may be covered under a policy’s definition of claim where those demands or investigations are made pursuant to more clearly-covered investigations that fall within the policy’s definition of the term “claim.”33

Also important to courts’ decisions when interpreting D&O policies is the type of relief sought by the government investigation. In Minuteman International, Inc. v. Great American Insurance, Co., for example, the court found that an SEC investigation was a claim to trigger D&O coverage based on a broader interpretation of the term “relief.”34 The court disagreed with the insurer’s position that relief must take the form of monetary damages, injunctive-type sanctions, or criminal charges; holding that the relief sought by the subpoena was the production of documents or testimony. That the subpoena was a demand for something due satisfied the court that the subpoena sought a form of “relief.”

Meanwhile, in Foster v. Summit Medical Systems, Inc., the Minnesota Court of Appeals found that an SEC investigation was not a claim to trigger D&O coverage because it did not subject the directors, officers, or company to a binding adjudication or relief.35 The policy defined a claim as “any judicial or administrative proceeding initiated against any of the Directors that may be subjected to a binding adjudication of liability for damages or other relief.” The court determined that a general SEC subpoena did not fit within either the ordinary or legal meaning of the term relief and, thus, held that the insurer did not have a duty to defend the insured in the SEC investigation based on the insured’s D&O policy.


It is important to realize that the costs of compliance with even seemingly informal or preliminary steps in a government investigation may be covered by a D&O or other liability policy. If such a situation arises, counsel should recommend that the policyholder seek defense from the insurer or reimbursement for compliance costs. Whether coverage exists will be always depend on the specific facts at issue and the language of the implicated policy. As illustrated in the cases discussed above, however, policyholders are often able to make a variety of arguments
in support of coverage for government investigations.

Joe Beavers is a Principal in Miles & Stockbridge’s Washington, D.C. and Baltimore offices. His practice focuses on the representation of policyholders in insurance coverage disputes. He is also a leader of the Firm’s eDiscovery team and counsels firm clients regarding the management and discovery of electronically-stored information.

Lee Crofton Douthitt is an Associate in Miles & Stockbridge’s Baltimore office. His practice focuses on litigation matters in the Firm’s Products Liability, Mass Torts, and Insurance Risk Management Practice Group.

The opinions expressed and any legal positions asserted in the article are those of the authors and do not necessarily reflect the opinions of Miles & Stockbridge, its other lawyers, or DefenseLine.


1Caitlin P. Holt, Subprime and Credit Crisis Investigations: What Constitutes a Claim for the Purposes of Professional Liability Insurance?, 18 Conn. Ins. L.J. 585, 585 (2012).
2Mark M. Bell & Richard W. Westling, Directors’ and Officers’ Insurance and Its Role in Government Investigations, New Appleman on Insurance: Current Critical Issues in Insurance Law, Spring 2013, at 43-44.
3See id.
4Holt, supra note 1, at 585.
5Joseph D. Jean & Rachel M. Wrightson, Ensuring Coverages for Actions in Response to Investigations, N.Y.J.L., July 9, 2009.
6Richard A. Kirby & Gregory S. Wright, Insurance Coverage for SEC Investigations, Coverage, November/December 2010, at 19.
7See ACE Am. Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789 (D. Md. 2008) (determining whether insured covered for costs responding to state consumer protection investigations under E&O policy).
8Id.; MBIA Inc. v. Federal Ins. Co., No. 08 Civ. 4313, 2009 U.S. Dist. LEXIS 124335 (S.D.N.Y. Dec. 30, 2009).
9Jean & Wrightson, supra note 5.
10Nancy D. Adams & Kristen S. Scammon, Navigating a Mine Field: Governmental Investigations, Cooperation, and D&O Insurance, 2012-JAN Bus. L. Today (2012).
11See id.
12Holt, supra note 1, at 586.
13Dietrich Knauth, Debate Rages over Suspension of Contractor Affiliates, Law360, May 22, 2013,
14Timothy Rampton and Roberta Rampton, U.S. Bans BP from New Government Contracts after Oil Spill Deal, Reuters, Nov. 28, 2012,
15Holt, supra note 1, at 588.
16Kenneth M. Breen & Thomas R. Fallati, Subprime Lending Meltdown — Part Three: Federal and State Investigations, Stay Current (Paul Hastings LLP, New York, N.Y.), July 2007 at 1, available at
17Bell & Westling, supra note 2, at 51-52.
18See ACE Am., supra note 7, at 795-97
19See Holt, supra note 1, at 586-88.
20See id. at 592-94.
21See id. at 592.
22Cent. Ill. Pub. Serv. Co. v. Am. Empire Surplus Lines Ins. Co., 642 N.E.2d 723 (Ill. App. Ct. 1994).
23Merriam-Webster Collegiate Dictionary 227 (11th ed. 2011).
24Black’s Law Dictionary 281-82 (9th ed. 2009).
25Holt, supra note 1, at 593.
26Patricia Bronte, D&O Coverage for Corporate Criminal Investigations, 7 No. 11 Ins. Coverage L. Bull. 3 (2008)
27Bell & Westling, supra note 2, at 53.
29MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (2d Cir. 2011).
30MBIA Inc., supra note 8.
31MBIA Inc., supra note 29.
32ACE Am., supra note 7.
33MBIA Inc., supra note 29; ACE Am., supra note 7.
34Minuteman Int’l, Inc. v. Great Am. Ins. Co., 2004 U.S. Dist. LEXIS 23876 (N.D. 2004).
35Foster v. Summit Medical Systems, Inc., 601 N.W.2d 350 (Minn. Ct. App. 2000).

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