insurance coverage for governmental investigations/media/files/events/event...2013/02/13 · •...
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Insurance Coverage for Governmental Investigations Ballard Spahr LLP
Alan S. Kaplinsky, Practice Leader Consumer Financial Services [email protected] 215.864.8544
Miller Friel, PLLC
Brian Friel, Founding Partner [email protected] 202.452.4872
Christopher J. Willis, Partner Consumer Financial Services [email protected] 678.420.9436
Murray Sacks, Of Counsel [email protected] 202.452.4884
Copyright 2013 by Ballard Spahr LLP and Miller Friel PLLC
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Upcoming Webinars
Creditors, Collectors, and Debt Buyers Beware: What the FTC's Debt Buying Study Means for the Consumer Financial Services Industry
February 21, 2013
Litigation Developments Series: - Credit, Debit, and Prepaid Card Litigation - Mortgage Litigation - Class Action Litigation
February 26, 2013 TBD TBD
HUD's FHA 'Discriminatory Effects' Final Rule – What It Means for Fair Lending Litigation and Enforcement
March 27, 2013
CFPB Mortgage Banking Developments Series (additional webinars) TBD
For information or to register, visit www.ballardspahr.com or e-mail [email protected].
Visit Ballard Spahr's ABA award-winning blog at www.CFPBMonitor.com.
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Moderator – Alan S. Kaplinsky • Practice Leader of the Consumer Financial Services Group at Ballard Spahr
• Devotes his practice to counseling financial institutions with respect to bank regulatory and transactional matters and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters)
• First President of the American College of Consumer Financial Services Lawyers
• Former Chair of the American Bar Association Committee on Consumer Financial Services of the Business Law Section
• Co-Chair of the Practising Law Institute’s Annual Consumer Financial Services Institute, now on its 18th year
• Has been named as a tier one banking and consumer financial services lawyer in the 2006 through 2012 editions of Chambers USA
• Has been named in The Best Lawyers in America under financial services regulation law and banking and finance litigation from 2007 to 2013
• Recently named the 2012 Philadelphia Lawyer of the Year for Litigation-Banking & Finance
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Panelist – Christopher J. Willis
• Partner at Ballard Spahr and a member of the firm’s Consumer Financial Services and Mortgage Banking Groups
• Counsels financial institutions on regulatory matters, advises them on compliance with consumer financial services laws, and defends them in both individual and class action lawsuits, as well as governmental enforcement actions (including CFPB investigations)
• Chairs the firm’s Fair Lending Task Force and Collection Documentation Task Force
• Named in The Best Lawyers in America for banking and finance litigation and commercial litigation for 2013
• Frequent author and speaker on issues relating to consumer financial services regulation and litigation
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Panelist – Brian G. Friel
• Founding Partner at Miller Friel • 20 years experience litigating and resolving insurance claims on
behalf of corporate policyholders • Won numerous trials and arbitrations on behalf of corporate
policyholders, including trial in May 2012 on behalf of oil/gas company where award of nearly three times policy limits (finding of bad faith)
• Settled insurance coverage disputes for financial institutions, oil and gas companies, electric utilities, and retailers
• Represents financial institutions, financial service companies, and construction companies in obtaining insurance coverage for governmental investigations
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Panelist – Murray D. Sacks
• Of Counsel at Miller Friel • More than 25 years experience litigating and resolving
insurance claims, both as advocate for corporate policyholders and in-house counsel for major insurance company
• Successfully resolved issues involving nearly every type of insurance policy through trials, motion practice, and settlement
• Represents financial institutions, financial service companies, product manufacturers, retailers, and construction companies in obtaining insurance coverage for governmental investigations
• Author of numerous articles including “CFPB -- A New Federal Agency Is On The Prowl -- No Worries, Your Business Insurance May Apply”
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The CFPB CID Process
• CID usually arrives without warning
• Within 10 days, recipient must “meet and confer” with enforcement staff to discuss any issues with CID and timetable for response (FTC is considering adopting a similar requirement)
• Any petition to set aside or modify the CID must be filed within 20 days of receipt, and extensions of this deadline are “disfavored” and usually not granted, even when significant production issues are still unresolved
• Filing of a petition stays time for compliance with requests that are the subject of the petition
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Practical Observations on CFPB CIDs
• Very broad requests in terms of subject matter
• Usually not focused on any particular conduct or violation of law
• All-encompassing definition of “document” to include every conceivable type of electronic information
• The biggest cost and burden association with responding to a CID is likely to be e-discovery
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Managing the E-Discovery Process
• Get together with your IT team to figure out what data exists; how to gather it; and how much there is
• Create an estimate of the volume of ESI before the “meet and confer” session and, if possible, obtain a cost estimate to gather, review and produce it
• For broad CIDs that encompass a variety of different types of requests, new review technologies like predictive coding are unlikely to be helpful
• Go to the CFPB (or other regulator) with a proposed e-discovery plan instead of just complaining that the CID is overbroad
• Don’t overlook preservation!
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Tools for Managing E-Discovery
• Phased responses – manually-gathered documents first, electronic search for ESI later
• Limiting email to certain custodians or certain sender and recipient combinations
• Limiting to certain time periods
• Search terms
• Omitting “loose files” or limiting search to specific custodians or folders
• Stay in contact with regulator on e-discovery progress and issues
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Potential E-Discovery Costs
• In our experience, responding to a government investigation can create e-discovery costs of $250,000 to several million dollars
• The costs of preservation of electronic documents can also be significant, if the investigation continues for a significant period of time
• Documenting these costs and using them to support compromises with the regulatory agency is a critical part of controlling the costs, but even under the best circumstances, the costs are likely to be high
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Insurance for Government Investigations -- Overview
• Companies Too Often Overlook Insurance Coverage for Costs Associated with Governmental Investigations
• Types of Policies and Key Policy Language
• Coverage Miller Friel Clients Have Obtained
• Case Law Supporting Coverage
• Other Important Issues
• Tips and Takeaways
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Insurance for Governmental Investigations is Often Overlooked
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Insurance for Governmental Investigations is Often Overlooked
• Many companies are not aware they may have coverage - Remember, insurance equals money
• When receive one of the following, should always ask “do we have insurance to cover this?” - Subpoena, CID, or other notice from government agency
- Consumer letter threatening litigation or demanding money
- Lawsuit
• Once ask “do we have” question, next step is to follow up with person/office responsible for insurance: General Counsel, Risk Manager, CFO, Treasurer, outside coverage counsel
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Types of Policies and Key Policy Language
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Types of Policies
• Errors and Omissions (E&O) or Professional Liability - Claims-made policy
- Covers wrongful acts of company and employees • Limited to professional services provided to customers/clients
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Types of Policies
• Directors and Officers (D&O) - Also claims-made policy
- What D&O policies cover • Side A -- Covers individual liability of directors and officers when not
indemnified by company
- Wide range of wrongful acts and claims
• Side B -- Covers company’s liability when company indemnifies directors and officers
- Wide range of wrongful acts and claims
• Side C -- Covers company’s direct liability as defendant
- Usually limited to securities claims
- Broader for non-public companies
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Key Policy Language
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Key Policy Language
• Definition of Claim -- the key issue - Sometimes not defined
- When defined, many different possibilities
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Key Policy Language
• Definition of Claim -- Example 1 - “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” • Formal or Informal
• Proceeding or Inquiry
• Or Similar Document
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Key Policy Language
• Definition of Claim -- Example 2 - “Regulatory . . . proceeding for monetary, non-monetary or
injunctive relief commenced by . . . the filing of a notice of charges, formal investigative order or similar document” • Adds non-monetary or injunctive
• No informal language
• No inquiry language
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Key Policy Language
• Definition of Claim -- Example 3 - “Any written notice received by an Insured that any person
or entity intends to hold any Insured responsible for a Wrongful Act”
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Key Policy Language
• Specific Coverage for Subpoenas - Example: Coverage for “expenses incurred while assisting
the Insured in responding to a subpoena which the Insured first receives and reports in writing to the Company during the policy period resulting from the performance of professional services by the Insured”
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Key Policy Language
• Newer Policy Language - Coverage for certain “pre-claim” inquiries from
governmental enforcement agency
- Coverage for requests to appear for interview or meeting with government enforcement agency
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Key Policy Language
• Summary -- What To Look For in Claim Definition and Related Policy Language: - Administrative or regulatory proceeding commenced by
formal or informal investigation order or request
- Coverage for subpoenas from government enforcement agency
- Coverage for governmental investigation commencing with demand for documents or other information
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Coverage Miller Friel Clients Have Obtained
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Coverage Our Clients Have Obtained
• Client A – Consumer Debt Collection Agency - Sued in private lawsuit for alleged improper debt collection
practices
- After lawsuit initiated, CFPB served CID on client
- Client obtained coverage for defense costs for both actions under E&O policy
- Insurer agreed to pay limited defense costs for CFPB investigation under specific subpoena coverage
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Coverage Our Clients Have Obtained
• Client B – International Engineering/Construction Company - Initially subject of investigation by DOJ and World Bank
for alleged violations in United States and abroad of False Claims Act and Foreign Corrupt Practices Act
- Beginning with investigation, D&O insurer paid full limits of policy ($10 million) for defense costs under Sides B and C
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Case Law Supporting Coverage for Governmental Investigations
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Case Law Supporting Coverage for Governmental Investigations
• MBIA Inc. v. Federal Insurance Co., 652 F.3d 152 (2d Cir. 2011) - MBIA sought coverage under its D&O policy for both NY
Attorney General investigation, commenced with subpoena, and SEC’s investigation, including oral requests for documents
- Policy covered securities claims, which included “a 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”
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Case Law Supporting Coverage for Governmental Investigations
• MBIA v. Federal (continued) - Court found coverage for NYAG subpoena because:
• At least a “similar document” to a formal or informal investigative order
• A sensible businessperson would view a subpoena as an investigative order
• Rejected insurers’ “crabbed view of the nature of a subpoena as a ‘mere discovery device’ that is not even ‘similar’ to an investigative order”
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Case Law Supporting Coverage for Governmental Investigations
• MBIA v. Federal (continued) - Court found coverage for SEC investigation and oral
request for documents because: • MBIA had asked SEC if it could comply voluntarily to avoid
adverse publicity of a subpoena
• Requests were part of SEC investigation
• Insurers cannot require insured to suffer extra public relations damage in order to obtain coverage
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Case Law Supporting Coverage for Governmental Investigations
• Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461 (8th Cir. 1990) - President of Arkansas bank sought coverage under D&O
policy for grand jury subpoena
- Claim not defined in policy
- Court held “the function of a subpoena is to command a party to produce certain documents and therefore constitutes a ‘claim’ against a party”
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Case Law Supporting Coverage for Governmental Investigations
• Dan Nelson Automotive Group, Inc. v. Universal Underwriters Group, 2008 WL 170084 (D.S.D. Jan. 15, 2008) - Auto dealer sought coverage under E&O policy for Iowa
AG CID under Iowa Consumer Fraud Act
- Claim not defined in policy
- Court held “the CIDs functioned to command the Plaintiffs to produce documents and provide information relevant to the alleged violations of statutes, and therefore constitutes a claim . . . .”
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Case Law Supporting Coverage for Governmental Investigations
• Employers’ Fire Insurance Co. v. Promedica Health System, Inc., 2011 WL 6937488 (N.D. Ohio Dec. 31, 2011) - When it works to their benefit, even insurers recognize that
governmental investigations are claims
- In this case, insurer sought to avoid coverage by arguing that the claim was first made in an earlier policy period
- Insurer successfully argued that FTC investigation was a claim under a D&O policy with a definition similar to the policy in MBIA
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Other Important Issues
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Other Important Issues -- Notice
• Requirements under claims-made policies - Provide notice promptly
- Some policies also require that the insured report the claim during policy period
- In real estate, it’s location, location, location. In insurance, it’s timing, timing, timing – especially near renewal dates.
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Other Important Issues -- Notice
• “Related Claims” language - Claims involving same or related wrongful acts are considered a single
claim made at the time the first claim is made against the insured
- Allows companies to pull later filed claims back into earlier policy
• Prior/Pending Exclusion - No coverage if any insured knew or had reason to know of wrongful act
before beginning of policy period or earlier date
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Other Important Issues -- Notice
• Notice -- Effect of Provisions - Usually must give notice during policy period or may lose
all coverage
- Failure to give notice may bar coverage for first claim as well as all later related claims
- No coverage under later policies for later claims because of prior/pending exclusion
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Other Important Issues – Sub-limits on Coverage
• Sub-limits on Coverage - Insurers may seek to limit their exposure by placing low
sub-limits on certain coverage • Example: Sub-limit for $5000 for response to governmental
investigation that may cost hundreds of thousands of dollars
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Other Important Issues – Panel Counsel and Billing Guidelines
• Panel Counsel and Billing Guidelines - If insurer agrees to defend, may try to do it on the cheap by
selecting “panel counsel” instead of counsel that insured wants or paying drastically reduced rates according to its billing guidelines
- Lower priced counsel simply are not appropriate when dealing with governmental investigations
- Need to negotiate to get what you deserve
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Tips and Takeaways
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Tips and Takeaways
• CIDs and subpoenas are not informal requests - Need to respond immediately and properly
• Insurance may cover the costs of responding to governmental investigations
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Tips and Takeaways
• Should seek an immediate defense
• Even allegations of intentional wrongdoing should be covered, at least for defense - Exclusions relating to intentional or dishonest conduct
usually don’t apply until there has been a judicial determination
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Tips and Takeaways
• Put insurer on notice of claim or potential claim immediately
• Keep insurer apprised of all significant developments in investigation
• Get insurer’s written consent to settle or at least a waiver of consent
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Tips and Takeaways
• Be careful of your broker’s role, particularly if claim develops - Brokers may have mixed loyalties
- Communications with brokers likely not privileged
- Consider use of outside counsel to assist in review of policies
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Tips and Takeaways
• Denial of coverage or reservation of rights is the beginning of the process, not the end - Need to present sound analysis why claim is covered
- Need to avoid landmines • Don’t characterize claim in a way that limits coverage
• Provide proper notice
• Minimize restrictions on defense counsel
- Need to take aggressive and active approach
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Questions / Resources
If you have questions about anything we covered today, please contact:
Visit Ballard Spahr’s blog, CFPB Monitor, at www.CFPBMonitor.com.
Subscribe to our e-alerts at www.ballardspahr.com.
Ballard Spahr LLP
Alan S. Kaplinsky, Practice Leader Consumer Financial Services [email protected] 215.864.8544
Miller Friel, PLLC
Brian Friel, Founding Partner [email protected] 202.452.4872
Christopher J. Willis, Partner Consumer Financial Services [email protected] 678.420.9436
Murray Sacks, Of Counsel [email protected] 202.452.4884