www.klng.com

Presented byDavid P. Schack, Partner

June 29, 2006

Insurance Coverage For Multi-State Investigations:

Can You Get Your Insurer to Pay for the Legal Costs and Payments Arising from the Investigation ?

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What Kinds of Policies Might Provide Coverage ?

• Commercial General Liability Insurance (CGL)

• Directors and Officers Liability Insurance (D&O)

• Errors and Omission Liability Insurance (E&O)

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CGL Coverage

• Bodily Injury

• Property Damage

• Advertising Injury

• Personal Injury

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Section I – Coverages

Coverage B. Personal and Advertising Injury Liability

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking damages.

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Section V – Definitions

14. Personal and advertising injury means injury, including consequential bodily injury, arising out of one or more of the following offenses:

a. False arrest, detention or imprisonment;

b. Malicious prosecution;

c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner,

landlord or lessor;

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Section V – Definitions (cont.)

d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

e. Oral or written publication, in any manner that violates a person’s right of privacy;

f. The use of another’s advertising idea in your advertisement; or

g. Infringing upon another’s copyright, trade dress or slogan in your advertisement.

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Key Issues Under CGL Coverage

• Broad duty to defend

• Defense Costs Outside of Limits

• Occurrence vs. Claims made — Expands the potentially triggered policies

• “Damage” requirement — Does the examination seek damages?

• “Suit” requirement — Is the investigation a “suit”?

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D&O Coverage

PART A:

The Company shall pay, on behalf of the Insured Persons, Loss for which the Insured Person is not indemnified by the Organization and which the Insured Person becomes legally obligated to pay on account of any Claim first made against the Insured Person during the Policy Period for a Wrongful Act.

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D&O Coverage (cont.)

PART B:

The Company shall pay, on behalf of the Organization, Loss for which the Organization grants indemnification to an Insured Person, as permitted or required by law, and which the Insured Person becomes legally obligated to pay on account of any Claim first made against the Insured Person during the Policy Period for a Wrongful Act.

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D&O Coverage (cont.)

PART C:

The Company shall pay, on behalf of the Organization, Loss which the Organization becomes legally obligated to pay on account of any Securities Claim first made against the Organization during the Policy Period for a Wrongful Act.

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Definition of “Wrongful Act”

Wrongful Act means:

(a) Any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by an Insured Person in his or her Insured Capacity, or for purposes of coverage under Part C, by the Organization; or

(b) Any other matter claimed against an Insured Person solely by reason of his or her serving in an Insured Capacity.

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Definition of Claim: Claim means:

(a) A written demand for monetary damages or non-monetary relief;(b) A civil proceeding commenced by the service of a complaint or similar pleading;(c) A formal civil administrative proceeding commenced by the filing of a notice of charges or similar document or by entry of a formal order of investigation or similar document; or (d) A criminal proceeding commenced by the return of an indictmentagainst an Insured Person or the Organization under Part C for a Wrongful Act.

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Key Issues Under Definition of Claim

• “Formal” vs. “informal” investigation

• Expand to include “subpoenas” and “target” letters

• Expand to include “investigations” without limitations

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Definition of Loss

Loss means the amount the Insured Person (for purposes of Part A and B) or the Organization (for purposes of Part C) becomes legally obligated to pay on account of any covered Claim, including but no limited to damages, judgments, settlements, pre-judgment and post-judgment interest and Defense Costs.

Typically “Loss” will not include punitive damages, taxes, fines, penalty and the multiplied portions of damage awards. To the extent these items are insurable, they may be included by negotiation. Restitution is typically not insurable.

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Definition of Defense Costs

Defense Costs means that part of Loss consisting of reasonable costs, charges, fees (including but not limited to attorneys’ fees and experts’ fees) and expenses incurred in defending any Claim and the premium for appeal, attachment and similar bonds.

Defense costs in a D&O policy typically reduce the available policy limits.

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Potentially Applicable D&O Exclusions

• Fraudulent/dishonest conduct

• Personal profit

• Known claims

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E&O Coverage

• E&O policies typically cover claims arising out of acts, errors or omissions in the provision of professional services.

• E&O coverage is not as widely purchased as D&O coverage.

• E&O coverage may expressly cover “investigations.”

• Many issues under E&O policies are similar to those for D&O policies.

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What Do You Need to Do, Upon Learning of an Investigation, to Preserve and Maximize Coverage?

Rule No. 1: Give notice to the insurer as soon as possible.

Why?

• Typically liability policies contain a “consent” or “no voluntary payment” clause.

• Insurer will take the position that pre-tender or pre-notice fees and costs are not payable.

• D&O and E&O policies are typically claims made/claims reported policies. Delay in reporting a “claim” beyond the policy period could bar coverage.

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Issues Relating to Selection of Counsel

• CGL: Has the insurer accepted defense with or without a reservation of rights?

• D&O/E&O: Does the policy require use of listed counsel for “securities claims” or otherwise?

• “Litigation Guidelines” promulgated by insurers

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What Types of Costs and Payments Are Covered?

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Questions?