December 3, 2021

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Court Corrects its Own Error in Win for D&O Policyholders

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Last month, the US District Court for the District of Connecticut granted an insurer’s motion for summary judgment in the case of Connecticut Municipal Electric Energy Cooperative v. National Union Fire Insurance Company of Pittsburgh, PA, No. 3:19cv839 (JBA), finding that there was no coverage under a directors & officers policy for defense costs associated with responding to a government subpoena. Last week, in line with our commentary, which highlighted several critical flaws in the court’s initial ruling, the court reversed itself and granted reconsideration, finding that there actually is coverage.

First Ruling

The case arises from the US Attorney’s Office’s criminal investigation of Connecticut Municipal Electric Energy Cooperative (“CMEEC”). The government issued two grand jury subpoenas to CMEEC, and, after a two year investigation, the grand jury indicted five CMEEC officers and directors for fraud. CMEEC sought coverage from National Union for its legal fees incurred in responding to the subpoenas, but National Union refused to pay. The court initially agreed with National Union stating that there was no coverage.

In an article appearing in Law360, we analyzed two crucial errors in the court’s original decision. First, the court improperly narrowed the scope of the duty to advance defense costs. Many D&O policies provide that the insurer has a duty to defend the insured. In contrast, CMEEC’s policy provided that CMEEC could control its own defense, but National Union had to pay the defense costs. National Union had the right to consent to defense costs, but could not unreasonably refuse its consent. It is well established that the duty to defend is broader than the duty to indemnify, and the duty to defend is triggered whenever there is the mere possibility that a lawsuit filed against the policyholder might be covered, even if ultimately there is no indemnity coverage for a subsequent settlement or adverse judgment. Courts addressing the duty to advance defense costs have held that it is equivalent in scope to the duty to defend. The District of Connecticut incorrectly held in its initial decision that the duty to advance defense costs was narrower and only triggered if there was actual (not the potential for) coverage.

Second, the court held that a government subpoena is not a “Claim” for a wrongful act. The CMEEC policy defined “Claim” as both a “written demand for monetary, non-monetary or injunctive relief” and a “criminal proceeding.” Courts have split on this issue, but the majority of courts have held that a government subpoena satisfies one or both of these types of “claims.” These courts reasoned that a subpoena seeks “relief” in the form of “the production of documents or testimony.” Syracuse Univ. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 975 N.Y.S.2d 370 (Table), 2013 WL 3357812, at *2 (N.Y. Sup. Ct. 2013) (finding coverage under identical policy). They also found that a grand jury subpoena is a criminal proceeding. Id.at *3. Notably, the District of Connecticut ignored binding precedent from the Second Circuit and decisions finding coverage that interpreted identical policy language. MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152, 160 (2d Cir. 2011).

Second Ruling

On CMEEC’s request for reconsideration, the court reversed course and held that there is coverage for the indictments, finding that CMEEC’s claim based on the subpoena amounted to a claim for a wrongful act sufficient to trigger coverage under the policy. The reversal was based in part on previously overlooked testimony by National Union’s corporate designee that indictments stemming from the subpoena were indeed “Claims” for “Wrongful Acts” by insureds. Because the indictments arose from the subpoena that CMEEC submitted during the policy period, they were deemed made during the policy period. Neither National Union’s reservation of rights nor its objection to CMEEC’s statement of material facts were sufficient to preclude summary judgment in CMEEC’s favor on that issue.

Conclusion

This ruling is a win for policyholders facing government investigations. It also illustrates the importance of probing the insurer’s interpretation of the policy in discovery. The witness’s admission showed that they had denied the claim in bad faith, despite knowing it was covered.

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