A federal court in Florida ruled this fall that a D&O policy does not cover the insured company’s costs in responding to an SEC investigation, nor its internal investigation costs in response to a whistleblower complaint.  See Office Depot, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 09-80554 (S.D. Fla. Oct. 15, 2010).  An investigation is not a “proceeding,” and costs incurred in advance of a “claim” do not “arise from” the claim, the court held.  A copy of the opinion is available here.

In Office Depot, the SEC conducted an informal, then formal investigation of both the company and certain directors and officers in connection with possible improper disclosure of non-public information.  The SEC then settled with the company and no lawsuit was filed.

The D&O policy covered “investigations” of an “insured person,” but not investigations of the company.  The policy also covered an “administrative or regulatory proceeding” against the company, but only if the “proceeding” was also maintained against an “insured person.”  The insurers acknowledged coverage for the investigations of the directors and officers, but not the investigation of the company.  The company sued the insurers, arguing that the investigation was a “proceeding” against both the company and the directors and officers.

The court agreed with the insurers.  The court noted that since the policy specifically distinguished between “proceedings” and “investigations,” it followed that “proceedings” as used in the policy could not include investigations.  The court further found that this interpretation conformed with the generally understood meaning of the word “proceeding.”

The court also held that the costs of an internal investigation conducted in the wake of a related whistleblower complaint, but before suits were filed, were not covered.  The policy covered “loss” that “arises from” a claim.  The court found that although the investigation may have assisted the company in the subsequent lawsuits, the investigation did not “arise from” the suits.  The court observed that the phrase “arising from” “connotes a sequential relationship between the covered event [the ‘claim’ or ‘securities claim’] and the covered ‘loss’ which ‘arises from’ it.”