Key Considerations for Obtaining Insurance Coverage for Internal Investigations

In today’s regulatory environment, companies more than ever face the prospect of having to conduct internal investigations. Internal investigations can be triggered when a company receives information suggesting that it may have engaged in serious misconduct. Such information can originate with past or present employees, customers, transactional partners, audits, or government officials investigating company conduct. They also can be triggered by whistleblowers, qui tam complaints, or civil actions. Given regulators’ and enforcement agencies’ high expectations when it comes to corporate cooperation—not to mention the potential business and reputational implications that can arise if a company does not get a handle on potential corporate wrongdoing—it often is necessary for a company to conduct a thorough internal investigation to find out what occurred and to take appropriate remedial measures. Such internal investigations can be time consuming and expensive. While an extreme example, it has been reported that Walmart spent more than $400 million related to a Foreign Corrupt Practices Act (FCPA) investigation that Walmart has been conducting and self-reported to the Department of Justice in November 2011.

Companies facing the prospect of an internal investigation should not overlook the availability of insurance coverage to pay for some or all of the expenses incurred. More importantly, companies should plan ahead so that in the event they need to conduct an internal investigation, they have put themselves in the best position possible to have the investigative fees and costs covered. Unsurprisingly, insurers often take narrow positions regarding coverage for internal investigations and attempt to deny coverage for expenses relating to them, arguing, for example, that such expenses do not constitute a covered “claim,” as defined in their policies. In situations in which the company has set up an independent board committee, insurers have contended that fees for outside counsel retained by the board committee to conduct an internal investigation are not covered because such counsel are not representing the “insured” or their work is not “defensive” since they are supposed to be neutral and objective. Therefore, according to this line of argument, fees to pay for counsel representing an independent board committee should not be covered as a “defense cost.”