The question of coverage for fees and costs incurred in connection with responding to subpoenas is a perennial D&O insurance issue. Policyholders are sometimes surprised and disappointed when their D&O insurer takes the position that their policies do not cover these amounts.


Whether or not there is coverage for fees incurred in connection with a subpoena often critically depends both on the specific facts and circumstances surrounding the subpoena and the specific language of the applicable policy. The critical issue under the policy is whether or not the subpoena comes with the applicable policy’s definition of the term "Claim."


A January 21, 2009 memorandum from the Lowenstein Sandler law firm entitled "Does a Subpoena Constitute a ‘Claim’ for Purposes of D&O Insurance Coverage" (here) takes a detailed look at several recent case decisions exploring these issues. As the memorandum notes, the cases show that these issues "are fact intensive as to both the wording of the definition of ‘claim’ and the particular facts surrounding the subpoena."


The cases discussed in the memo show a number of things in connection with the question whether a subpoena is a "Claim."


First, the wordings of the policy definition of the term "Claim" vary substantially between policies and the precise wording used can be determinative.


Second, in addition to the wording of the policy, the nature of the subpoena involved also is critically important. A court may well have a different perception of, say, a grand jury subpoena, compared to an administrative subpoena, for example.


Third, courts apparently have been willing to consider outside factual matter (for example, the affidavit testimony of one of the attorneys involved regarding the nature of the investigation surrounding the subpoena), which can be highly relevant to a fact intensive inquiry.


Fourth, in addition to the definition of the term "claim," the presence of allegations of a "Wrongful Act" can also be an important determinant in the inquiry whether the fees and costs incurred in connection with a subpoena are covered. The typical D&O policy provides coverage for loss arising from a "Claim" based on an "actual or alleged Wrongful Act." As the memo shows, whether or not a subpoena represents a "Claim," there may still be a question whether an actual or alleged Wrongful Act is involved.


The question of what constitutes a "Claim" may be one of the most frequently recurring coverage issues under a D&O policy, and the actual wording used is critical. As the memo notes, "often seemingly minor differences can be coverage-determinative."


In that regard, in summarizing the lessons from the cases, the memo notes several truths about the D&O insurance coverage placement process with which I heartily concur:


it is essential that the insurance broker or consultant be expert in D&O policies and negotiate with the insurer for the best possible definition of claim. All D&O insurance policies are not created equal. More expensive D&O policies frequently provide better coverage than less expensive ones. Optimally, the insurance broker or consultant should not simply present the insured with a policy, but a consideration of different policies, so that the insured can perform a cost/benefit analysis.


The memo concludes with an observation of the need to provide timely notice.


And If SEC Subpoenas Are Involved: In many instances, the subpoena that is the source of the coverage dispute has been issued by the SEC. Readers who find themselves dealing with the issue of whether or not there is coverage under a D&O policy for fees and costs incurred in connection with an SEC subpoena may find it helpful to refer to the SEC’s Enforcement Manual, which can be found here.


The Manual, which was only recently made public, describes the SEC’s enforcement practices and policies in detail, and may prove useful in trying to understand what various SEC actions and processes may represent.


A Related Issue: An issue that also frequently occurs in conjunction with the question of coverage for fees and costs incurred in responding to a subpoena is the question of coverage for fees and costs incurred in connection with a criminal investigation. In a recent post (here), I reviewed the issues surrounding the question of coverage under a D&O policy for expenses incurred in connection with a criminal investigation.


Eleventh Circuit Affirms Options Backdating Lawsuit Dismissal: Although they may seem but a distant memory, the options backdating cases continue to grind through the courts. In a January 9, 2009 opinion (here), the Eleventh Circuit affirmed the lower court’s dismissal of the securities class action lawsuit filed in connection with the options backdating allegations involving Witness Systems. Background regarding the case can be found here.


The lower court had dismissed the case in reliance on the Supreme Court’s decision in the Tellabs case, holding that the complaint did not satisfy the PSLRA’s requirements for pleading scienter. The trial court dismissed the case without allowing the plaintiffs leave to amend, though the plaintiffs had requested leave in a footnote to an opposition brief.


A copy of the district court’s opinion can be found here. My prior blog post discussing the dismissal can be found here.


The Eleventh Circuit, after noting that as a result of the options backdating the company had "minimally overstated earning" between 2004 and 2006, affirmed the dismissal.


Among other things, the Eleventh Circuit noted that the complaint contained no allegation that the company’s CEO "had any knowledge of the accounting principles relating to stock options," and observed that the inference that the CEO "knew that backdated options in 2000 and 2001 had led to overstated earnings during the class period in 2004 to 2006 is not as compelling as the competing inference that he was unaware that backdated options had affected financial statements several years later."


The court specifically noted that the "de minimus change" in the financial statements was not a "glaring ‘red flag’" that the company was overstating earning.


The Eleventh Circuit also affirmed the district court’s denial of leave to amend, because the plaintiffs’ request for leave to amend was "imbedded within an opposition memorandum."


I have updated my table of options backdating securities lawsuit settlements, dismissals and dismissal motion denials in order to reflect the Eleventh Circuit’s decision. The table can be accessed here


A January 15, 2009 memorandum from the Carlton Fields law firm discussing the Eleventh Circuit’s decision can be found here. Special thanks to Dave Leonard of the Carlton Fields firm for sending along a link to the memo.


You Decide: Article II, Section 1 of the U.S. Constitution specifies with respect to an incoming President of the United States as follows: "Before he enter on the execution of his office, he shall take the following oath or affirmation:–‘I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.’"


Which raises and interesting question: Did Obama actually complete the oath as required by the Constitution? Roll the tape and decide for yourself. (Hat tip to the Law Blog for the link to the YouTube video.) Ask yourself as you watch whether or not it is relevant that Obama, while serving in the Senate, was one of 22 Democratic senators to vote against Roberts’ confirmation. This was, by the way, the first time that a Chief Justice has sworn in a President that voted against him.