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Tuesday, August 12, 2014

Land of Confusion: Insurance Coverage for Pre-Suit FCPA Investigation Costs under D&O liability Policies

By Rory Eric Jurman and Avery A. Dial

Bloomberg recently reported that Walmart spent $439 Million in the past two years related to a Foreign Corrupt Practices Act (“FCPA”) investigation . Moreover, Walmart predicts that it will spend an additional $200 Million to $240 Million for fiscal 2015 on the investigation. Walmart self reported the suspected violation to the Department of Justice ("DOJ") in November of 2011.

At almost a half billion dollars in investigative costs, the Walmart matter is an extreme example of the costs that can be associated with a FCPA investigation. Any company with international operations should be concerned with FCPA compliance. Further, a company and its individual directors and officers should have an understanding of their available insurance coverage for FCPA investigations. In a FCPA case, a company may spend significant money prior to suit. D&O policies may, or may not, cover pre-suit FCPA investigation costs, depending on the specific language of the policy.

The Purpose of the FCPA

The legislative intent of the FCPA was to control bribery of foreign officials because bribery undermines fair competition, weakens the rule of law, and facilitates other criminal activity. The FCPA addresses international corruption in two primary ways: 1) the anti-bribery provisions, which prohibit individuals and businesses from bribing foreign government officials to obtain or retain business; and 2) the accounting provisions, which are intended to prevent an issuer from falsifying books or circumventing internal controls.

Both the Department of Justice and the Securities and Exchange Commission enforce the various civil and criminal provisions of the FCPA against companies and the officers and directors, agents, employees, and stockholders of companies.

Are FCPA pre-suit investigation costs covered under D&O Policies?

Arguably, the primary purpose of D&O liability insurance is to pay for the defense of directors and officers in legal actions against the directors or officers related to his or her duty as a director or officer.

FCPA indictments and civil suits are typically preceded by an investigation. As demonstrated in the case of Walmart, investigative costs can be shocking. Moreover, because cooperation in FCPA investigations is valued by the DOJ and the SEC , companies may spend money on investigative costs before actually being formally charged, sued, or served with a subpoena.

Are these pre-suit / pre-indictment costs covered expenses under a D&O liability policy? As with all coverage questions, it turns on the specific language of the policy in question.

Office Depot v. National Union

Although not a FCPA case, Office Depot v. National Union Fire Insurance, 734 F. Supp.2d 1304 (S.D. Fla. 2010), aff’d mem., Office Depot v. National Union Fire Insurance, 453 Fed.Appx. 871 (11th Cir. 2011) is certainly instructive with regard to insurance coverage related to government investigations. In this case, the court found that pre-suit investigation costs were not covered. Office Depot sought declaratory judgment and breach of contract against National Union Fire Insurance (“National Union”) and American Casualty Insurance Company (“American”) . Id. at 1307. The question presented, as stated by the Office Depot court, was “whether a corporation can recover under an organization and executive liability insurance policy for costs incurred in voluntarily responding to a [SEC] investigation that did not culminate in filing of a judicial or administrative complaint by the SEC against the company or any of its officers or directors.” Id. at 1308.

In early July of 2007, Office Depot received a whistleblower letter regarding accounting irregularities that led to an internal investigation and audit. Id. at 1311. On July 17, 2007 the SEC issued a letter to Office Depot advising that was conducting an inquiry to determine whether Office Depot violated any securities laws. Rather than require the SEC to issue subpoenas, Office Depot voluntarily cooperated with the SEC by providing documents and making its employees and officers available for sworn statements . Id. at 1310-1311.

The Insurers sought summary judgment establishing that there was no coverage for defense costs voluntarily incurred by Office Depot in responding to the SEC’s investigation. Further the insurers sought summary judgment establishing that there was no coverage for Office Depot’s internal investigation and audit. Id. at 1312.

The claims made National Union policy insured Office Depot for “Securities Claims” made against it for “Wrongful Act[s]” as an organization and provided reimbursement to Office Depot when it indemnified individual officers, directors, and employees for damages the individuals have been obligated to pay for “Claims” against them for “Wrongful Act[s]” committed in their official capacity. Id.

The National Union Policy defined “Wrongful Act” for the organization as being limited “solely in regard to a Securities Claim.” With respect to “Executive[s]” and “Employee[s],” the policy defined “Wrongful Act” as relating “to either a Securities Claim or other Claim.” “Securities Claim” was defined, in part, as a “Claim other than an administrative or regulatory proceeding against, or investigation of an Organization.” This provision later has a carve back that states “Securities Claim” shall include administrative or regulatory proceedings “but only if and only during the time that such proceeding is also commenced and continuously maintained against an Insured Person.” Id. at 1309.

The Office Depot court found that the SEC investigation was not a “Securities Claim” because the “administrative or regulatory proceeding against” language in the carve back provision did not, under the circumstances of the Office Depot case, include the SEC’s informal or formal investigation of Office Depot. Id. at 1320. The court reasoned that the initial definition of "Securities Claim" made a distinction between “proceeding against” and “investigation of.” The carve back, however, did not carve back “investigation of.” Rather, the carve back only carved back “proceeding against.”

Further, the Office Depot court found that the SEC investigation was not a “Claim.” While the definition of “Claim” included investigations, those circumstances were limited to where the Insured Person was identified in writing; or in the case of SEC investigations, after service of a subpoena. Id. at 1320.

Additionally, the Office Depot court found that the policy definition of “Loss” including “Defense Costs” does not include investigating potential claims. The Office Depot court noted “[t]hat the policy does not exclude 'pre-claim' investigation costs form the definition of covered 'Loss' and 'defense costs' does not detract from this plain reading of the Policy. The Policy definition of covered 'Loss' does not encompass pre-suit or pre-claim investigation costs. Since the Policy does not cover these losses in the first instance, there is no reason to carve a policy exclusion to eliminate them.” Id. at 1323.

MBIA v. Federal Ins. Co.

In contrast to Office Depot, MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (2d Cir. 2011), is an example of how different policy language can lead to different results.

MBIA came under scrutiny related to three transactions. As a result, the SEC issued subpoenas to MBIA in 2004. Shortly thereafter, the New York Attorney General’s (“NYAG”) office issued subpoenas to MBIA. Id. at 156. In the summer of 2005, the SEC and NYAG considered issuing new subpoenas. Id. at 156, 157. However, MBIA voluntarily complied the new requests. Id.

Financial regulators investigated MBIA, Inc. (“MBIA”) and MBIA made claims against D&O policies issued by Federal Insurance Co. (“Federal”) and ACE American Insurance Co. (“ACE”). Unlike the policies in Office Depot, the MBIA policies’ definition of “Securities Claims” included “formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document.” Id. at 155. Emphasis Added.

In short , that the definition of “Securities Claims” included both formal and informal investigations was outcome determinative in MBIA.


FCPA pre-suit investigation costs may be covered depending on the specific policy language in the applicable policy. While neither Office Depot or MBIA specifically address FCPA investigations, the general principals set forth in both cases are applicable to FCPA investigations. Remember, both the SEC and DOJ have authority to enforce the FCPA. Accordingly, there is a colorable argument that an SEC enforcement action or investigation for FCPA violations may meet the definition for “Securities Claim” in certain insurance policies.

As corporate counsel, you should consult with your outside coverage counsel for opinions on whether your current policies protect you against FCPA investigations. Also, when shopping for insurance, look for policies that provide coverage for pre-suit investigation costs and policies that specifically cover FCPA claims. Several insurers, such as AIG, specifically provide policies and/or endorsements that cover potential claims and costs. In order to prevent being lost or mired in the Land of the Confusion, when such a claim needs to be made under a D&O policy, prudent Corporate Counsel may want to consider reviewing these coverages with their insurance broker before the genesis of any issues.

1. Genesis. "Land of Confusion" Invisible Touch. Atlantic, 1986.

2. Renee Dudley, David Voreacos, “Wal-Mart Says Bribe Probe Cost $439 Million in Two Years,” Bloomberg (March 26, 2014),

3. See Generally A Resource Guide to the US Foreign Corrupt Practices Act, By the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission.

4. Id.

5. 54-55.

6. The American Policy was an excess policy that followed the form of the National Union Policy.  Id.  at 1308.

7. Afterwards, in November of 2007, shareholders filed derivative actions against Office Depot.  Also, in 2008, the SEC served Office Depot and some of its current and former employees or officers with formal subpoenas and, in 2009, served  “Wells Notices” to three Office Depot officers.   Id. at 1311, 1312.  However, National Union agreed to indemnify Office Depot for defense costs incurred defending the securities lawsuits and the defense costs incurred by officers and directors served with SEC subpoenas and Wells Notices.

8. This is a truncated analysis of MBIA to simply demonstrate the difference in definition of “Securities Claim” vis-à-vis Office Depot.  However, MBIA is rich with analysis of other issues and we recommend that you read it in its entirety.

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