Late on Friday, November 19, 2010, the Wall Street Journal reported that federal prosecutors, the FBI and the SEC are in the final stages of an unprecedented three-year investigation into insider trading by consultants, investment bankers, hedge fund and mutual fund traders, and analysts.1 The SEC has already subpoenaed more than thirty hedge funds and investors, and some civil or criminal charges may be brought before the end of the year.

Those responding to subpoenas, investigations or claims arising out of the government’s insider trading probe should look to directors and officers (“D&O”) or errors and omissions (“E&O”) liability insurance for coverage for defense costs and, in some cases, settlements or judgments arising out of insider trading claims.

Depending on policy terms, subpoenas can qualify as “claims” under some D&O and E&O policies entitling insured respondents to payment for “defense costs” incurred in responding to the government’s requests for information or documents. In some cases, coverage for regulatory investigations depends on identifying the “target”—whether an insured officer/director or the insured organization. Policies may provide coverage for an investigation of the “insured organization” only if also continuously maintained against an “insured person.” Other policies may explicitly address investigations against “insured persons” but make no mention of coverage for an investigation of the “insured organization.” In still other cases, courts may allow coverage for regulatory investigations—regardless of the “target”—in recognition of the fact that the focus of a regulatory investigation is determined closer to the end of the investigation than the beginning.

Of course, once the investigation has concluded, if a claim is pursued, D&O and E&O insurance may also provide for the advancement of defense costs incurred in connection with civil or criminal proceedings against an insured person facing insider trading allegations. If civil proceedings result, insured persons may in some circumstances obtain indemnification for amounts paid in satisfaction of a settlement or judgment—particularly as long as the “personal benefit” requirement for tipper liability is a different, lower standard than the “personal profit” exclusions found in many D&O and E&O policies.

In any event, D&O or E&O liability insurance may provide an invaluable resource for insureds faced with what is predicted to be an unprecedented onslaught of civil and criminal insider trading claims. Insureds should be vigilant in providing notice to their insurers of subpoenas and investigations as well as traditional claims and suits. With so much at stake, policyholders should also vigorously defend their coverage rights and seek coverage counsel when appropriate.