Government Subpoena Issued to Insured Company Not a “Claim” Against Individual Insured

Applying Kentucky law, a federal district court has held that a subpoena issued to an insured company was not a “Claim” under a D&O policy’s Side B coverage because the subpoena failed to identify an “Individual Insured.”  Springstone, Inc. v. Hiscox Ins. Co., 2020 WL 4506097 (W.D. Ky. Aug. 5, 2020).  The court also held that no coverage was available to the entity because coverage was barred by an exclusion for any Claim “seeking fines or penalties or non-monetary relief against the Company.”

A qui tam lawsuit was filed under seal against an insured behavioral health company for alleged violations of the False Claims Act.  Shortly thereafter, the Office of the Inspector General for the Department of Health and Human Services (the OIG) issued a subpoena to the company as part of its investigation of the qui tam action.  The company requested coverage under its D&O policy in connection with its response to the subpoena.  The D&O insurer denied coverage, and the company sued the insurer for breach of contract, common law and statutory bad faith, and unjust enrichment.

In the coverage litigation, the insurer argued that there was no Side B coverage for the company’s response to the subpoena because (1) no Individual Insured was ever identified in writing by the OIG, as required by the Claim definition (and thus, there was no Claim) and (2) the company never indemnified any Individual Insured as required by the insuring agreement.  The company conceded that the subpoena did not identify any Individual Insured in writing, but argued that the subpoena constituted a Claim against Individual Insureds because it formed part of the OIG’s investigation of employees and executives, as demonstrated by an email from the company’s counsel identifying potential custodians of records, and a memorandum from the deputy attorney general emphasizing the importance of prosecuting individuals responsible for corporate fraud.  The court held that the subpoena was not a Claim against Individual Insureds because the OIG did not identify any Individual Insured in writing as a target of its investigation.  The court determined that the documents the company cited were irrelevant because the OIG did not author them.  The court further explained that Side B coverage applies only when and to the extent that the company indemnifies an Individual Insured for a Loss, which the company undisputedly did not do here.  The court thus held that the subpoena did not trigger the policy’s Side B coverage.

The insurer also argued that there was no Side C coverage for the company’s response to the subpoena based on an exclusion for any Claim “seeking fines or penalties or non-monetary relief against the Company, provided, however that this exclusion shall not apply to any Securities Claim.”  The company conceded that the subpoena was a demand for non-monetary relief and that, on its face, this exclusion applied.  The company argued, however, that the Policy’s “Loss” definition included “Defense Costs” for “the costs and expenses of complying with any injunctive relief or other form of non-monetary relief.”  The company argued that, if the exclusion were interpreted to bar coverage for the Defense Costs that the company incurred in responding to the subpoena, then the exclusion would render that portion of the Loss definition illusory.

The court rejected the company’s arguments.  The court determined that the policy’s “Loss” definition plainly provided that “Defense Costs” are covered only if “such Defense Costs result from a covered Claim” and, other than Securities Claims, Claims seeking non-monetary relief against the Company are not covered under the policy’s Side C coverage.  The court further explained that coverage is illusory only when an insured cannot foresee any circumstance under which it can collect under a particular policy provision.  The court reasoned that there were numerous circumstances in which the company could recover Defense Costs for “the costs and expenses of complying with any injunctive relief or other form of non-monetary relief,” including in connection with a Claim under the policy’s Side B coverage, or for a Securities Claim under the policy’s Side C coverage.

The court thus held that the policy did not afford coverage for the company’s costs incurred in responding to the subpoena, and it dismissed the company’s claims with prejudice.