As any company who has gone through it will tell you, informal government investigations and internal investigations can be costly affairs. Many companies hope to defray those costs with organization and executive liability insurance policies. Does your liability insurance policy cover costs incurred in connection with a government or internal investigation? According to a recent decision in the Southern District of Florida, it may not.
On October 15, 2010 in Office Depot v. National Union Fire Insurance Company of Pittsburgh, PA and American Casualty Insurance Company of Reading, PA, the Southern District of Florida found that certain investigatory costs did not fall within “the policy’s definition of loss ‘arising from’ a covered ‘Securities Claim’ made against Office Depot, or a covered ‘Claim’ made against one of its officers, directors or employees….” This was a significant result for Office Depot, who sought reimbursement of more than $23 million in costs and expenses.
The Court’s decision in Office Depot is not always the outcome, however. In December 2009, the Southern District of New York ruled in MBIA, Inc. v. Federal Insurance Co. and ACE American Insurance Co., that MBIA’s policy did cover the investigatory expenses at issue. The outcome was surely well received by MBIA, who claimed to have spent $29.5 million “for the costs of defending and responding to the regulatory investigation[s] and follow-on litigation.”
Why the different findings? The answer lies in the Courts’ close analysis of the specific language in the companies’ insurance policies, as well as the facts surrounding the government and internal investigations. While the Office Depot and MBIA rulings may not allow you to predict the result of an insurance coverage dispute, they do reveal an important principle: Your company needs to look closely at its organization and executive liability insurance policy. How does the policy define “claim” (and/or “securities claim”)? Does it cover administrative or regulatory investigations or proceedings? Must a regulatory agency issue a formal order before your policy kicks in?
The bottom line: Businesses that may be subject to government inquiry or caused to undergo internal investigations would be well advised to spend some time wading through your insurance policy now, and avoid spending for investigatory costs later.