Federal Court Determines Individual’s Receipt of a Subpoena Does Not Establish the Existence of an Investigation of a Wrongful Act by the Recipient

The United States District Court for the District of Columbia, applying Virginia law, denied an insured’s motion for partial judgment on the pleadings in part, finding that an insured person’s receipt of a subpoena does not automatically establish that a governmental agency is investigating both the insured entity and the insured person. Fed. Home Loan Mortg. Corp. v. Twin City Fire Ins. Co., 2024 WL 4722148 (D.D.C. Nov. 8 2024). The court also granted the insured’s motion in part, finding that the excess insurers could not challenge payments made by underlying insurers.

The insured is a government-sponsored entity that buys and sells mortgages on the secondary market. Since 2007, the insured has dealt with legal repercussions from the subprime mortgage crisis. In 2007, the insured faced a securities class action alleging that the insured and its employees made misrepresentations about the risks associated with subprime mortgages. Eleven more lawsuits followed, and the insured tendered them to its D&O insurance program for the 2007-2008 policy year. In 2008, the insured faced an investigation by the United States Securities and Exchange Commission (“SEC”), which, it asserted, was based on the same alleged misrepresentations. As part of the investigation, the SEC served subpoenas on 36 of the insured’s employees. The SEC eventually entered into a non-prosecution agreement with the insured entity and filed charges against some of the individuals. The SEC investigation, too, was tendered to the insured’s D&O program. The primary D&O policy generally provided specified coverage for regulatory investigations of insured persons, but not of the insured entity. However, it provided entity coverage for regulatory investigations “if and only during the time that such proceeding is also commenced and simultaneously maintained against an Insured Person.” The first four layers of the insured’s D&O program were exhausted—primarily by the civil lawsuits. The insured applied some of the third layer to the “earliest incurred costs,” some of which predated the subpoenas. Certain of the higher-level excess insurers denied coverage for costs associated with the SEC investigation on the basis that, notwithstanding that individuals received subpoenas, the investigation was only of the entity and not of the individuals. Coverage litigation followed, and the insured moved for partial judgment on the pleadings.

The court issued a split decision, granting the insured’s motion in part and denying it in part. The court sided with the insurers in finding that the subpoenas were not, in and of themselves, sufficient to trigger coverage for the SEC investigation. Discovery would be needed to establish whether the SEC was in fact investigating Wrongful Acts of those individuals or whether it was solely investigating the company. The court reasoned that treating a subpoena to an insured individual as a Claim per se would negate the distinction in the policy between investigations solely of the company and investigations of the company and insured individuals. The court sided with the insured in finding that the insurers could not challenge the third-excess insurer’s payment for pre-subpoena costs, which the insurers asserted should not have been covered. The court reasoned that the excess policies are follow-form policies and there was no specified language in them reserving the right to challenge prior payments.