Who Pays to Defend Those Damn Subpoenas?
All too often a company’s first and only response to a DOJ, SEC, or IRS subpoena is to bring in the big legal guns. While that’s fine, it’s not enough. Those lawyers expect to be paid, so the very next step should be to send the notice to the D&O or E&O insurer. Sometimes that happens; sometimes it doesn’t, at least not right away. Frequently it is not until a formal proceeding or lawsuit is brought that the insured realizes there may be coverage . . . and by then it may or may not be too late.
Policies usually exclude coverage for claims first made against the insured prior to the policy period. Insureds, when sued, after being subpoenaed, argue that the suit contains new or different allegations than were the subject of the subpoena, and therefore, the exclusionary provisions for “related” claims should not apply. That is the battleground in BioChemics v. AXIS Reinsurance Co., 2013 WL 401123. There the insured sought a quick summary judgment on the insurer’s duty to defend. The insurer sought discovery to prove claims brought during the policy period were “related” to the subpoena served before the policy period, and argued it needed discovery to establish the “relatedness.” The insured argued that the insurer was not entitled to use extrinsic evidence to defeat a duty to defend, and so there was no need for discovery. The court sided with the insurer, and permitted discovery. Whether the fruits of such discovery will defeat a claim that the insurer owed a duty to defend, in part because, as the insured argued, subpoenas are inherently vague, and do not “allege” facts or claims, remains to be seen.
Please note: The author is counsel to the insured.
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