Can D&O Insurance Cover Regulatory Investigations?

Directors and Officers insurance—commonly referred to as D&O coverage—may cover the cost of legal defense associated with regulatory investigations, but you should read the policy terms carefully to determine whether these expenses are covered. Some policies may cover directors and officers as individuals while providing little protection for the business entity itself.

Insurers often dispute when coverage begins. The insurer may also try to insist that an exclusion or limitation bars coverage in a particular situation. Here we review D&O coverage and reasons why regulatory investigation expenses may or may not be covered under a particular policy.

What Is D&O Insurance and What Does It Typically Cover?

D&O insurance policies are generally designed to protect the personal assets of the directors and officers who lead a company because these individuals are frequently the target of lawsuits whenever someone is unhappy about company actions. If corporate directors or officers are sued for actions they’ve taken on behalf of the company, D&O policies provide legal defense and financial protection. This coverage helps protect leaders from personal liability for damages and legal fees.

Standard D&O policies have three “sides” or types of coverage, but policies can be customized to provide only one or more types of coverage.

• Side A coverage pays for defense costs directly if the company is unable to
• Side B coverage reimburses the company for funds expended indemnifying directors and officers
• Side C coverage protects the entity itself against losses from lawsuits

These Insurance policies protect leadership in a variety of situations, such as when shareholders file a claim for breach of fiduciary duty or a corporation is sued for negligence leading to injuries. D&O policies typically exclude claims related to intentional wrongdoing such as fraud or graft.

When Can D&O Insurance Cover a Regulatory Investigation?

While many expenses associated with a regulatory investigation can be covered by a D&O policy, some penalties and fines are uninsurable. These penalties are meant to deter wrongful conduct, so allowing them to be covered by insurance would allow the perpetrators to get away unscathed, eliminating the deterrent effect.

Limitations and exclusions may apply differently depending on the investigation.

Investigations Targeting the Actions of Individual Directors or Officers

Although D&O policies are designed to protect individual directors and officers, the policy might not provide coverage unless there is a formal agency inquiry and the targeted leader receives a formal written notice specifically naming them. This could take the form of a Wells Notice, a formal letter from the SEC or FINRA notifying an individual that, as a result of an investigation, the agency intends to recommend that administrative or civil charges be filed against them.

Formal notice can also come in the form of a target letter, a notification from a federal prosecutor that the named recipient is the target of a grand jury investigation because substantial evidence links them to alleged criminal activity. Policies also generally recognize a grand jury subpoena or formal regulatory proceeding notice naming the director or officer as formal identification of a target triggering coverage.

If the company and individual leaders within the entity are targeted, the insurance company may insist that legal fees and other defense costs be allocated between them.

Investigations Targeting the Company

D&O policies are designed to protect the assets of individual leaders within the corporation rather than the corporation’s bottom line. Formal notice that triggers coverage for individual directors and officers often does not trigger coverage when the investigation targets the entity itself. Coverage of expenses related to a regulatory investigation may depend on policy terms, including endorsements that extend coverage beyond traditional boundaries.

What Regulatory Investigation Expenses May Be Covered by a D&O Policy?

When coverage is triggered, D&O policies frequently cover expenses such as:

• Costs of preparing for interviews with regulatory officials
• Expenses of collecting and reviewing documents
• Fees for consultations with experts
• Fees for attorneys’ services and associated defense expenses
• Expenses associated with enforcement such as costs of compliance or fines

As noted earlier, some fines and costs may not be legally insurable. Policies also often exclude many enforcement costs.

Common Reasons Insurers Deny D&O Investigation Coverage

In our experience, there are five primary reasons that insurers give for denying a claim for D&O coverage stemming from a regulatory investigation:

• The investigation at issue does not rise to the formal level of investigation required to qualify for coverage
• The regulatory investigation does not specifically target a covered director or officer
• The investigation targets the organization and coverage does not apply
• Exclusions in the policy apply to the situation
• The policyholder failed to satisfy notice or consent requirements

Remember, just because an insurance company provides a reason for denial does not mean that reason is legally valid under appropriate scrutiny.

FAQS About D&O Coverage Connected with Regulatory Investigations

Does D&O insurance cover SEC investigations?

Many D&O policies will cover the defense costs associated with SEC investigations, especially when the investigation identifies an insured individual as a target.

Does D&O insurance cover government subpoenas?

The answer depends on the policy language and whether a subpoena is sufficient to trigger coverage under the policy.

Can an insurance company deny D&O coverage for a regulatory investigation?

Yes, the insurance company can deny the claim, but the reasons may or may not be legally valid. An insurance attorney may be able to challenge the denial successfully, depending on the policy terms.

Ver Ploeg & Marino Understands How to Resolve Complex Policy Disputes

Coverage disputes involving D&O insurance often hinge on nuances in policy interpretation, so it is critical to understand how terms have been traditionally defined in the industry and in the courts. At Ver Ploeg & Marino, we have decades of experience helping policyholders recover the proceeds they should receive under their policies. 

We know how insurance companies work, and we know how to succeed in the claims process. Schedule a confidential consultation today to discuss how our team may be able to help in your situation.

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