LawFlash

Federal Judge Rules D&O Coverage for Wrongful Acts Extends to Responding to Government Subpoenas

June 06, 2018

US District Judge Manish S. Shah in the Northern District of Illinois last week denied insurers’ motion to dismiss a pharmaceutical company’s action seeking insurance coverage for the costs associated with responding to a US Department of Justice subpoena in an ongoing healthcare fraud investigation. The opinion notably expands the scope of the factors courts consider in determining whether a particular insurance policy’s “Wrongful Act” requirement was met for the purposes of activating an insured’s policy coverage. The opinion may provide support for policyholders’ requests to their insurers for coverage of the costs of responding to government investigation-related subpoenas even before any specific violation is charged.

In Astellas US Holding, Inc. v. Starr Indemnity and Liability Co., et al., No. 17-cv-8220, 2018 WL 2431969 (N.D. Ill. May 30, 2018), policyholder Astellas filed a declaratory judgment action seeking insurance coverage for the costs associated with responding to a March 2016 US Department of Justice (DOJ) subpoena. DOJ is conducting an ongoing investigation into allegations that Astellas provided donations to nonprofits that help poor patients buy the company’s product, potentially in violation of the Anti-Kickback Statute.

The defendants—Starr Indemnity and Liability Co; Beazley Insurance Co., Inc.; and Federal Insurance Co.—filed motions to dismiss arguing that Astellas’ policies “cover losses from claims for wrongful acts” and neither the subpoena nor a tolling agreement between Astellas and DOJ count as “covered claims.”[1] Judge Shah wholly rejected the defendants’ argument and ruled that the DOJ subpoenas were covered under Astellas’ policy language, and that Astellas is eligible for insurance coverage for the costs associated with responding to the subpoena.

Under Astellas’ policy, “[t]he Insurer shall pay on behalf of the Company the Loss arising from a Claim . . . against the Company for any Wrongful Act.” Therefore, the facts at issue must not only support that a claim as defined under the policy was filed, but also that the claim was for a wrongful act as defined under the policy. The critical analysis stems from the policy’s definition of “Wrongful Act” as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Company.”[2] Judge Shah found that the DOJ subpoenas to Astellas can fall under coverage for “a written demand for plaintiffs to appear before government officials and to produce specific documents. This is a demand for non-monetary relief.”[3] Specifically, Judge Shah reasoned:

The broad definition of a ‘claim,’ which includes overlapping subparts, indicates that the policy was designed to cover something like the subpoena — which is a demand for relief in response to an accusation of wrongdoing. Thus, the ‘result’ in this insistence [sic] — that Starr may have to cover plaintiffs’ costs related to the subpoena — is not absurd, it is precisely what the policy intended.[4]

Recent cases regarding D&O insurance coverage for responding to subpoenas suggest a general trend has emerged that, under certain circumstances, courts will accept subpoenas as a “demand for non-monetary relief” and require insurers to cover the often significant costs companies incur when facing allegations that they violated federal law and responding to government subpoenas.[5] Notwithstanding these cases, courts may hold that a policy does not extend to coverage for costs associated with responding to a subpoena where the subpoena does not allege wrongdoing, because that does not rise to the level of a claim for non-monetary relief.[6]

Astellas suggests that courts may consider the totality of circumstances in determining whether “Wrongful Act” policy requirements have been met. This development provides support for insurance coverage for responding to government subpoenas where the government is alleging a possible violation of law.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

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Carl A. Valenstein

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Nathan J. Hochman

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Tinos Diamantatos

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Eric W. Sitarchuk

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Dora Wang

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Daniel Chia

Washington DC
Giovanna M. Cinelli
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Margaret M. Gatti
James Hamilton
Kenneth J. Nunnenkamp



[1]  2018 WL 2431969, at *1

[2] Id. at *3.

[3] Id. at *4.

[4] Id. at *5.

[5] See, e.g., Patriarch Partners, LLC v. AXIS Ins. Co., No. 16-cv-2277, 2017 WL 4233078, at *1 (SDNY Sept. 22, 2017), ruling that a US Securities and Exchange Commission (SEC) subpoena against Patriarch Partners and its CEO Lynn Tilton satisfied the definition of “claim” under the policy, as it represented a “demand” for “non-monetary relief” in the form of requested documents.

[6] See, e.g., MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 712 F. App’x 745 (10th Cir. 2017). The policy coverage did not extend to costs for responding to an SEC subpoena based on explicit language in the subpoena, which stated that it “should not be construed as an indication that the Commission or its staff believes any violation of law has occurred”.