Each year since its creation in 2011, the Consumer Financial Protection Bureau (“CFPB”) has steadily increased the number of investigations and enforcement actions commenced against financial companies. These investigations and enforcement actions can be costly; the defense costs associated with these actions alone can quickly escalate into the millions of dollars.
Further, any settlement with the CFPB has the potential to cripple a financial company’s ability to operate. To date the CFPB has required financial companies to pay in excess of $4.6 billion in relief to consumers and $150 million in civil penalties.1 And there is no light at the end of the tunnel – the CFPB is well funded, well staffed, and its budget is continually increasing. Thus, it is expected that the CFPB will only increase the number of investigations and enforcement actions it pursues. 2
As a result of the increasing assertiveness of the CFPB, financial institutions are seeking to transfer or defray the costs associated with these actions. One readily accessible avenue is the insurance policies already maintained by many financial companies. Below are the initial steps that a financial company should consider upon receiving an inquiry from the CFPB.
(1) Evaluate Your Insurance Policies For Coverage
After receiving an initial inquiry from the CFPB, the first step for any financial company is to review its insurance portfolio. This includes but is not limited to a review of Directors & Officers (“D&O”), Errors & Omissions (“E&O”), and Comprehensive (or Commercial) General Liability (“CGL”) policies.
D&O and E&O policies are the most likely source of coverage for CFPB actions. These policies typically include a definition of “Claim” that provides coverage for: (1) written demands for monetary, non-monetary, and injunctive relief; (2) investigations; (3) subpoenas and requests for production; (4) subpoenas to provide sworn testimony; and (5) enforcement proceedings and lawsuits. Thus, whether the CFPB pursues an informal or formal investigation, or commences an enforcement action or lawsuit, financial companies should examine these policies closely to determine whether coverage is potentially available.
CGL policies also may be a source for coverage. While these policies traditionally have more limited definitions of what constitutes a “Claim,” coverage still may be available based on the allegations asserted by the CFPB. For example, CGL policies typically provide broad coverage for “personal and advertising injury,” and certain insurers sell endorsements that expand the scope of this coverage to insure personal injury as a result of discrimination. Because the CFPB pursues financial companies for ethnic and racial discrimination in the extension of credit, CGL policies may respond to these types of claim. Thus, it is important to review the basis for the CFPB action, and whether coverage is available under a CGL policy.
(2) Provide Prompt Notice To Insurers
Providing notice of a potential claim or occurrence is a strategic decision that should take into consideration both legal and business issues. D&O and E&O policies typically require claims against an insured to be reported to the insurer promptly, and either during or shortly after the policy period (or extended reporting period). CGL policies generally require prompt notice as well.
The unexcused failure to provide timely notice can be fatal to coverage, particularly in jurisdictions, like New York, that tend to construe strictly notice provisions even where insurers are not prejudiced by allegedly late notice. Yet providing notice can itself have adverse business consequences, if the insurer seeks to rescind the policy (thus arguably precluding coverage for subsequent claims) or refuses to renew the policy or only agrees to do so for substantially increased premiums. Although these sorts of concerns can be overstated, they need to be factored into any decision of when and what to report – particularly where notice is optional.
Another consideration in deciding whether and when to give notice is the Prior & Pending Litigation Exclusion typical in D&O and E&O policies. The Prior & Pending Litigation Exclusion typically provides that an “Insurer shall not be liable to make any payment for Loss in connection with any Claim . . . alleging, arising out of, based upon or attributable to . . . any pending or prior (1) litigation, or (b) administrative or regulatory proceeding or investigation of which any Insured had notice; or alleging or derived from the same or essentially the same facts as alleged in such pending or prior litigation or administrative or regulatory proceeding or investigation.” Consequently, if the CFPB commences an enforcement action after the expiration of the policy period, an insurer may contend that coverage is barred based on the above exclusion.
Given these potentially competing interests, it is important to evaluate the benefits and detriments of providing notice promptly after the initial inquiry by the CFPB. Financial companies should consult with their underlying defense counsel and coverage counsel regarding these issues.
(3) The Legal Landscape Is Still Developing
Because the CFPB only recently came into existence, courts have not had an opportunity to resolve disputes regarding coverage for CFPB actions. Nevertheless, there is a significant body of decisions involving coverage for other regulatory actions, and the recent trend by courts is to provide coverage with respect to investigations and enforcement actions. See, e.g., Protection Strategies, Inc. v. Starr Indemnity and Liability Co., No. 1:13-CV-00763 (E.D. Va. Sept. 10, 2013). It follows that courts would similarly provide expansive coverage for CFPB investigations and enforcement actions. Financial companies should be skeptical of any contentions by insurers that coverage is not available for CFPB actions.