The United States District Court of the Eastern District of Michigan, applying Michigan law, has held that: (1) the costs of defending an SEC proceeding were a "Claim Expense" to the extent the costs were incurred by counsel retained by the insurer; (2) an SEC proceeding for disgorgement of fees sought "money" and therefore constituted a "Claim" as defined by the professional liability policy at issue; and (3) supplemental coverage for disciplinary proceedings did not limit coverage for disciplinary proceedings that otherwise constituted covered claims. Doeren Mayhew & Co. v. CPA Mut. Ins. Co. of Am. Risk Retention Group, 2007 WL 2050826 (E.D. Mich. Jul. 18, 2007). These issues were before the court on cross-motions for reconsideration of the court's prior summary judgment ruling. [That earlier opinion, Doeren Mayhew & Co. v. CPA Mut. Ins. Co. of Am. Risk Retention Group, 2007 WL 118939 (E.D. Mich. Jan. 10, 2007), was summarized in the March 2007 Executive Summary.]
The insurer provided a certified public accounting firm with professional liability insurance. The policy defined "Claim" as "a written demand received by You for money or services naming You and alleging an act or omission, in the rendering of Professional Services. A demand shall include the service of suit or the institution of arbitration proceedings against You." The policy defined "Claim Expenses" as "those fees charged by an attorney we designate or consent to, and all other fees, costs and expenses resulting from the investigation . . . defense and appeal of a Claim, if incurred by us or by You with our written consent." The policy also contained a duty to defend provision, which stated that the insurer has "the right and duty to defend any Claim."
The insured company provided auditing services for a financial group that subsequently filed for bankruptcy. In 1999, numerous civil lawsuits were filed against the company alleging that it contributed to the fraud committed by the financial group by way of approving the group's financial statements. The insurer paid the defense costs incurred by the company in defense of the suits, which did not result in liability to the company.
In 2003, after the SEC filed a disciplinary proceeding against the company, the company settled the action, agreeing to disgorge fees that it had earned. Subsequently, the company and its insurer engaged in coverage litigation regarding whether the SEC proceeding and subsequent disciplinary proceedings instituted by the state of Michigan constituted a "Claim" under the policy. In resolving the issue on cross-motions for summary judgment, the court determined that the SEC proceeding was not a "Claim" and that the costs of defending the SEC proceeding were not a "Claim Expense," but that the insurer had a duty to defend the policyholder against the state proceeding because that proceeding did satisfy the policy's definition of "Claim."
In reconsidering its prior ruling, the court first addressed its prior determination that the defense fees incurred because of the SEC proceeding were not a Claim Expense of the earlier civil litigation, despite the fact that the insured was advised by counsel to delay the settlement of the SEC action so as not to affect the then pending civil litigation. The company argued that because defense counsel hired by the insurer advised it not to settle the SEC action since such a settlement might affect the civil litigation negatively, the counsel's fees were covered "Claim Expenses" related to the civil action. The court agreed, concluding that, because the insurer had retained the counsel for the civil action and counsel had advised the company regarding the SEC action as it affected the civil action, counsel fees were covered Claim Expenses. The court also ruled that fees incurred by SEC counsel that the company retained without the consent of the insurer were not "Claim Expenses" of the civil action and thus were not subject to coverage.
The court then reconsidered its prior determination that the SEC action did not constitute a "Claim" under the policy. The insured argued that, because the SEC had the authority to seek civil penalties, the action constituted a demand for money and thus satisfied the policy's definition of "Claim." The court rejected this argument, emphasizing that, while the SEC had such authority, it did not actually seek penalties in connection with this proceeding. However, the court then addressed whether the fact that the SEC sought disgorgement rendered the SEC action a "demand for money" sufficient to satisfy the policy's definition of "Claim." Previously, the court had determined that a demand for disgorgement constituted "a demand for equitable relief in order to prevent unjust enrichment" rather than a demand for "money." Stating that this approach failed properly to consider Michigan law requiring that policy terms be interpreted according to their plain meaning, the court reversed itself and found that disgorged fees are "money" under the plain and ordinary meaning of the term. Accordingly, the court held that the SEC action was a "Claim" as defined by the policy. In so ruling, the court noted that the company had not sought coverage for the amount of the disgorged fees but instead sought only a determination that this proceeding was the basis for a "Claim" under the policy and that the company would not be entitled to indemnity for the disgorged funds in any event.
The court next turned to the insurer's argument that because the state disciplinary proceeding sought equitable relief that was not covered by the policy, it did not trigger a duty to defend under the policy, regardless of whether the proceeding constituted a "Claim." The court first noted that since by virtue of its reconsidered ruling the SEC action was a "Claim," this argument now related to the SEC action as well. It then rejected the insurer's argument, holding that the policy's applicable duty to defend provision contained no limitation that the relief sought by a claimant must be subject to coverage in order for a duty to defend to be triggered.
Finally, the court rejected the insurer's argument that coverage for the state disciplinary proceeding was limited to the supplemental "disciplinary proceeding" coverage specifically provided by the policy. The court found that the disciplinary proceeding satisfied the policy's definition of claim and thus fell under the policy's main coverage grant. Stating that "supplemental benefit for disciplinary proceedings covers costs that are not covered under the general portion of the policy," the court concluded that the supplemental coverage could not function as an exclusion to restrict coverage for disciplinary proceedings if they were otherwise subject to coverage under the policy.