'Practical Realities' Argument Rejected Resulting in No Coverage for Defense Costs in SEC Investigation
Insurance Law Update
U.S. Court of Appeals for the 11th Circuit
In Office Depot, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2011 WL 4840951 (11th Cir. (Fla.) Oct. 13, 2011), the U.S. Court of Appeals for the 11th Circuit affirmed the District Court's determination that most of the $20 million in legal fees that Office Depot incurred while responding to the Securities and Exchange Commission (SEC) inquiries was not covered under its directors and officers' (D&O) liability policies.
In July 2007, Office Depot provided "notice of circumstances" to its D&O insurers that a claim might be filed against Office Depot based on news accounts that it may have violated federal securities laws by selectively disclosing nonpublic information. Thereafter, the SEC sent Office Depot a letter advising it that it would begin conducting an inquiry to determine whether it had violated securities laws. Office Depot conducted an independent review, including the use of outside counsel and forensic evidence. Ultimately, Office Depot reached a settlement with the SEC.
In an action for declaratory judgment brought by Office Depot, the District Court entered summary judgment in favor of the insurers, concluding that most of the legal fees incurred by Office Depot were not covered under the policies.
On appeal, the parties agreed that defense fees incurred in the shareholder and securities lawsuits, as well as fees incurred in responding to SEC subpoenas and Wells notices, were covered. At issue, however, was whether there was coverage for defense fees incurred during the informal aspects of the SEC inquiries and for Office Depot's own internal investigation. Office Depot argued that the policy, which provided coverage for losses "arising from Securities Claim," covered all of Office Depot's attorney's fees incurred after it received the SEC's initial letters.
However, the 11th Circuit, based on the policy definition of "Securities Claim," concluded that the SEC's request for voluntary cooperation in furtherance of its presuit discovery constituted an "investigation" rather than an "administrative or regulatory proceeding." Fees associated with those activities were excluded from coverage. Similarly, the court concluded that the initial SEC letters did not constitute a securities claim because they did not allege that violations had occurred or identify specific individuals who could be charged in future proceedings.
The 11th Circuit also concluded that the District Court did not err in finding that the policy covered only attorney's fees incurred after a securities claim was made against an insured. Recognizing that Office Depot's argument was based mostly on the practical realities of securities litigation, the court nevertheless found that the plain language of the policy required that costs must "result solely" from a securities claim. Finally, the court rejected the Office Depot's argument that pre-claim fees should be covered by virtue of the "relation back" language of the notice/claim reporting provision.