The Second Circuit recently issued a decision in MBIA Inc. v. Fed. Ins. Co., 2011 U.S. App. LEXIS 13402 (2d Cir., July 1, 2011), finding coverage for investigative costs associated with: 1) a subpoena issued by the New York Attorney General; 2) a formal order issue by the SEC; and 3) related derivative actions. 

The company’s D&O policy provided coverage for “Securities Loss” for which an insured becomes legally obligated to pay as the result of a “Securities Claim.”  Securities Claim was defined as “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar documents.”  The definition of Securities Loss included “Securities Defense Costs,” which was defined as “costs incurred in defending or investigating Securities Claims.”

First, the Second Circuit affirmed the district court’s finding that the subpoena issued by the New York Attorney General qualified as a Securities Claim.  The Court cited New York law stating that the New York Attorney General may commence an investigation and that the form the investigation takes is the service of a subpoena.  In addition, the Court found that an ordinary businessperson would understand a subpoena to be a “formal or informal investigative order” and that, at a minimum, a subpoena qualifies as a “similar document” as used in the definition of Securities Claim.

Second, the Court found that the formal order issued by the SEC also qualified as a Securities Claim.  The Court rejected the insurer’s argument that the investigation was not covered because it was conducted by way of oral request instead of by subpoena or other formal documents.  The Court held that the entire investigation qualified as a Securities Claim because it was all connected to the formal order.  The Court explained that the SEC did not issue subpoenas or formal requests because the company complied voluntarily and that the insurers “cannot require that as an investigation proceeds, a company must suffer extra public relations damage to avail itself of coverage a reasonable person would think was triggered by the initial investigation.”  Id. at *7. 

Finally, the Court found that the costs incurred by the company’s Special Litigation Committee (“SLC”) in investigating the derivative litigation was also covered.  There, the issue was whether the SLC qualified as an “Insured Person” under the policy.  The Court found that although the SLC was comprised of independent directors, it was not independent of or distinct from the company itself and thus qualified as an “Insured Person.”

Although much of the decision turns on the policy language at issue in MBIA, the decision also makes it clear that companies who choose to voluntarily comply with covered investigations in order to avoid extra publicity are not somehow waiving their rights to coverage under their D&O policy.