This is a trick question. Investigative costs that are a necessary part of defending an officer, director or the Company that has been sued, are generally insured under Directors and Officers (D&O) policies, subject of course to the insurer’s agreement that such costs are reasonable and necessary for a proper defense of covered allegations.  However, when you are referring to internal investigations or governmental or regulatory investigations that occur prior to any charges being levied—the answer is less clear, and sometimes “no”.

This is a trick question. Investigative costs that are a necessary part of defending an officer, director or the Company that has been sued, are generally insured under Directors and Officers (D&O) policies, subject of course to the insurer’s agreement that such costs are reasonable and necessary for a proper defense of covered allegations.  However, when you are referring to internal investigations or governmental or regulatory investigations that occur prior to any charges being levied—the answer is less clear, and sometimes “no”.

Does it matter that much? Yes; it can matter a lot.  Such proceedings can last years and involve millions of dollars in legal, accounting and forensic costs.  

D&O policies are typically not subject to investigation exclusions, per se.  So what is the difficulty with getting coverage under a D&O policy?  The issue is a definitional one. You see, the D&O coverage grant is usually couched in generic-sounding terms such as “wrongful acts”, “insured person”, “scope of the insured’s duties”, “claim” and “loss”.  If the claim allegations do not fall within these definitions, coverage does not apply.  The specific concern here is the definition of “claim”.

A “claim” must be made before the insurer has any duties under the policy to pay or reimburse defense costs, expenses, or pay for settled or adjudicated amounts (with only minor exceptions).  So here-in-lies the problem for “investigation costs”.  Most types of investigation costs are incurred before a “claim” is first made against the insured organization or insured person.  

Even though you will see some reference to covered investigations within the definition of “claim”, they are almost always limited to formal investigations of identified Insured Persons.  Generally, the insured company is only protected for certain securities-related investigations if it is an on-going co-defendant with a specifically identified insured person.  

“Claim” definitions are often broader than just “demands for relief”, but one must examine the fine print carefully. Contemporary D&O policies usually require certain events or documents to pass before a “claim” is considered made as detailed in the below table. 

Type of “Claim”	Commenced/Triggered by
Claim for monetary or non-monetary relief	Written Demand
Civil Proceeding for monetary or non-monetary relief	Service of Complaint or similar pleading
Criminal Proceeding	Return of Indictment or similar legal document
Arbitration or Mediation Proceeding	Written Demand or petition for Arbitration
Administrative or Regulatory Proceeding	Filing of Notice of Charges; Entry of a Formal Order of Investigation
Extradition of an Employee or Executive	An Official Request for Extradition
Shareholder Derivative Demand	An investigation conducted by the Organization after receipt of a written demand by a Shareholder asking it to bring a civil proceeding against an Individual Insured

As a practical matter, the Securities & Exchange Commission, Department of Justices, Attorney Generals and other investigating authorities do much of their work in an informal manner, before anyone is identified, and before any of the defined types of covered proceedings begin.  

We are finding that on certain larger accounts, D&O policies can be extended to include coverage for certain types of the common expenses associated with an investigation, such as:

• Certain pre-claim inquiry defense costs of Insured Persons.  The Insured Company is not covered for such costs, and the insurers are usually careful to keep such covered pre-claim costs from including expensive document recovery activities.

• Subpoenas and interviews of Insured Persons.  Again, when these extensions are offered, they are usually limited to the expenses of the insured persons.  Sometimes the coverage for Insured Persons is further limited to only those individuals who are not indemnified by the Company – so called Side A only protection.  

• Broadened protection for the benefit of insured persons when there is an Investigation instigated by stockholders to determine whether a Derivative Action should be brought against a director or officer.  Such Derivative Investigation Demands will still usually be subject to a relatively low sublimit – such as $250,000 or no more than $500,000.

You will note that these broadened policy terms are mostly designed to extend protection for the insured persons.  The fact that these coverage extensions have had little or no additional premium effect for those companies that have obtained them, helps answer the question as to how much added protection they actually provide.

There have been some efforts by the insurance industry to offer corporate protection for certain types of investigations such as alleged violations of securities or bribery laws.  Thus far though, the premiums for such policies are high, subject to many coverage limitations or very specific types of investigations, and the market offerings are few.  The reasons for the high costs are the potentially high costs of such investigations and the limited market for such insurance.

In light of these facts, we recommend the following actions for risk managers and executives:

• Confer with corporate legal counsel to educate yourself about what issues are being investigated by regulators.  This will help guide your loss prevention and compliance efforts, prepare you for the event should you receive notice of an investigation, and help steer effective negotiations with your insurers in securing coverage terms that are meaningful to your organization.

• Understand the scope of your current D&O insurance protection.  Ensure that all appropriate management and stakeholders have realistic expectations regarding the coverage that would be afforded for investigations.

• Consult with insurance experts to ensure that your company has “state of the art” insurance terms added to your standard D&O insurance policy, especially if you have directors who are expecting the broadest forms and types of coverages.  

• Finally, work with your broker to monitor the state of the insurance market with respect to the availability of either reasonably-priced standalone Investigation policies or any new extensions to regular D&O insurance terms.  The D&O insurance market has evolved fairly dramatically in the past decade, and further changes are likely.