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District Court Tackles What Constitutes ‘Defense Costs’ in D&O Claim
Insurance Law Update
U.S. District Court for the Southern District of New York
In MBIA, Inc. v. Federal Ins. Co., 08 Civ. 4313 (Dec. 30, 2009), the U.S. District Court for the Southern District of New York held that “defense costs” under a directors and officers (D&O) insurance policy include fees and costs incurred when responding to a New York attorney general subpoena or a Securities and Exchange Commission (SEC) subpoena, and the defense costs of the nominally named corporation’s defense counsel in a derivative suit.
In particular, in construing the term “securities claim,” the court held that a subpoena issued by the state attorney general constituted a formal investigative or regulatory order or other “similar document[].” Thus, while a subpoena is not a formal investigative order, nor is it a regulatory order, the court found that a subpoena was “similar enough” to a formal order to qualify as a "securities claim" for which coverage, and ensuing defense costs, would be provided.
The court employed similar reasoning in concluding that the costs of responding to a SEC subpoena were covered. The court noted that a subpoena can only issue after a formal investigation has been launched. While the defendants pointed out that the SEC subpoena exceeded the scope of the original order of investigation, in the view of the court, it was sufficient that a logical nexus existed between the initial and subsequent transactions, i.e., plaintiff's financial and accounting practices. This, reasoned the court, justified defense cost reimbursement for all three transactions.
The court rejected the insured’s request for payment of the fees incurred by an independent consultant retained as part of a regulatory settlement, because the insured settled the regulatory investigation without seeking or obtaining the D&O insurer’s consent. However, the court held that the fees and costs of the insured’s own defense counsel were covered, even though the same law firm was simultaneously representing the company’s Special Litigation Committee (SLC). The insurers pointed out that under corporate law a SLC must be “independent” from the company and, therefore, the same law firm could not defend the company while being independently representing the SLC. The court did not directly address this issue but concluded that defense cost coverage would exist even if counsel had represented only the SLC.
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