SEPTEMBER 2005 Insurance Coverage Insurance Coverage for Investigations and Demands of State Attorneys General The CEO forwards to the general counsel a document just received from the state attorney general’s office. Styled a “Civil Investigation Demand” (“CID”), the document starts with an alarming assertion: the State has determined that the company may have engaged in illegal and anti-competitive conduct for many years in the conduct of one of its core businesses. The CID goes on to demand an astonishing array of highly confidential, proprietary, and, in some cases, privileged documents. The risks to the corporate interest are substantial and are immediately evident: ■ the cost of responding to these demands; ■ the diversion of precious internal resources; ■ the risk of negative publicity as befell companies and industries that have had the misfortune to be subjected to other coercive actions initiated by prominent state attorneys general; and ■ perhaps most ominously, the risk that the CID could be but a precursor to an onslaught of claims brought by the plaintiffs’ bar. This “hypothetical” is based on a reality experienced, unfortunately, by an increasing number of business organizations, including companies in the utility, petroleum, chemicals, retail, healthcare, housing, technology and entertainment industries. Virtually every day, through the issuance of CIDs, state attorneys general are making highly intrusive demands on corporations throughout the country. As corporations develop their responses, a sometimes overlooked component of the overall corporate strategy is the corporate insurance asset. A corporation’s insurance contracts may well afford significant financial protection against the costs flowing from a CID. But just as was the case with other government efforts to fasten liability on corporate America — for example, the Superfund enforcement initiatives — these potentially valuable insurance rights must be properly preserved and, if necessary, aggressively pursued. This Alert explains how common types of insurance, general liability insurance and errors and omissions insurance, may respond to CIDs. INSURANCE COVERAGE THAT MAY RESPOND TO CIDS General Liability Insurance The starting point in any insurance review should be the company’s general liability policies in effect at any time during the period potentially implicated by the CID. While their terms vary, most general liability insurance policies expressly cover, among other things, “advertising injury” and “personal injury.” And, a number of judicial decisions have interpreted general liability policies broadly to cover defense costs in connection with: — anti-trust claims — unfair trade practices and consumer fraud claims — interference with business and contractual relationships claims Importantly, defenses costs—including the costs of investigation associated with a CID—are covered under standard-form CGL policies so long as there is a potential of coverage under the policy. In most jurisdictions, an insurer must provide a defense of an entire claim, if any part of the claim is potentially covered. Application of these rules may well support an argument that the insurer must cover defense costs incurred as a result of the issuance of a CID. Indeed, one of the most frustrating aspects of many CIDs — their breadth and sweeping assertions of potential liability — may actually aid the corporate policyholder seeking defense cost coverage under the foregoing legal principles. Corporations, however, should expect that some insurers will dispute their defense obligation on the purported basis that (i) under the terms of the insurance policy, the defense duty is not triggered until there is a formal lawsuit, and (ii) a CID is not a “suit” within the meaning of the policy. To date, there appears to be little, if any, reported law addressing this issue in the context of a CID. However, policyholders may draw substantial support through judicial decisions addressing whether a policyholder’s receipt of a “potentially responsible party” letter from a governmental authority proceeding under the Superfund Act and similar statutes constitutes a “suit,” thereby triggering the insurer’s duty to defend under CGL insurance policies. Although the case law is split, the majority rule is that a PRP letter does activate the insurer’s defense duty. These majority decisions often explain that a PRP letter is the functional equivalent of a lawsuit; i.e., it is adversarial, coercive, triggers significant obligations on the part of the policyholder and, if ignored, can and will seriously impact the policyholder’s rights and could open the policyholder to significant liability to the governmental agency from which the demand was issued. The same holds true for a policyholder subjected to a CID, and accordingly, this reasoning may support the position that a CID likewise triggers an insurer’s defense duty. Errors and Omissions Insurance Errors and omissions or professional liability insurance policies (collectively “E&O” policies), typically cover claims arising out of acts, errors or omissions in the provision of professional services, as defined in the policies. Such policies often expressly cover “investigations” and do not require policyholders to satisfy the “personal injury” or “advertising injury” definitions found in general liability policies. While many companies do not purchase E&O coverage, many business organizations, e.g., financial institutions, health care providers, pharmaceutical companies, do. Accordingly, E&O coverage may also be a valuable source of protection. CONCLUSION Coverage in a particular case will of course depend on the actual facts of each case, the terms, conditions and exclusions of each individual policy, and the applicable law. Companies receiving a CID may find it prudent to examine their insurance programs and evaluate what coverage may be available, what can be done to enhance the protection provided, and what can be done to minimize efforts by insurers to reduce the coverage. It is important to note that the insurance policies may impose certain conditions that, if breached, will result in a loss of coverage, according to insurers. Thomas M. Reiter treiter@klng.com 412.355.8274 Roberta D. Anderson randerson@klng.com 412.355.6222 2 SEPTEMBER 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP If you have questions or would like more information about K&LNG’s Insurance Coverage Practice, please contact one of our lawyers listed below: International Contact Boston Dallas Harrisburg London Los Angeles Miami Newark New York Pittsburgh San Francisco Washington Peter J. Kalis John M. Edwards Robert Everett Wolin Carleton O. Strouss John Magnin David P. Schack Daniel A. Casey Anthony P. La Rocco Peter J. Kalis Thomas M. Reiter Edward P. Sangster Matthew L. 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