In an October 13, 2011 Opinion that carefully considers the language of two insurance policies, the Eleventh Circuit Court of Appeals ruled that Office Depot, Inc. was not entitled to coverage for most of the legal fees incurred by the company while responding to inquiries from the SEC. In-house counsel would be wise to review their respective policies to determine if company would face a similar issue or would be covered if an SEC investigation occurs.

The key events in the case began in the summer of 2007 when a news article alleging misconduct led to an SEC investigation.

•           In June 2007, a Dow Jones Newswire article stated that Office Depot may have violated federal securities laws by selectively disclosing nonpublic information. 

•           On July 11, 2007, Office Depot forwarded a copy of the article to the carriers as “notice of circumstances” that a claim might be filed against it in the future. 

•           On July 17, 2007, the SEC sent Office Depot a letter advising it that the Commission would begin conducting an inquiry into Office Depot to determine whether Office Depot had violated securities laws for various accounting practices and followed that up with an August 6, 2007 letter requesting certain documents relating to the allegations.

•           Meanwhile, the company conducted an independent review of the allegations which resulted in an October 29, 2007 announcement that certain financial statements would have to be revised and others delayed. The company self-reported each problem to the Commission.

•           On January 10, 2008, the SEC issued a formal order of investigation. It indicated that the Commission had information suggesting that Office Depot had broken securities laws.

•           In the two years following the order of investigation, the SEC issued subpoenas to various officers and directors, and “Wells Notices” recommending civil action against three officers. 

•           In December 2009, the SEC filed a formal complaint, and Office Depot announced that it had reached a settlement agreement with the SEC staff.

Office Depot filed suit against two of its carriers, National Union Fire Insurance Company (“National Union”) and American Casualty Company, requesting a declaratory judgment that it was entitled to coverage under its insurance policies for more than $20 million in legal fees incurred during the SEC’s inquiries. The district court determined that most of the legal fees were not covered by the policy and granted summary judgment in the carriers’ favor.

The Eleventh Circuit Court of Appeals rejected the four arguments raised by Office Depot. First, Office Depot contended that the language in its policy which provided coverage for Losses “arising from” securities claims, covered all of its costs incurred after Office Depot received its first SEC letter on July 17, 2007. The Court concluded that the policy at issue eliminated coverage for two types of potential securities claims: (1) claims relating to administrative or regulatory proceedings against Office Depot and (2) claims related to an administrative or regulatory investigation of Office Depot.  The policy included a carve-back provision which restored coverage for the former under certain circumstances, but did not restore coverage for an investigation. The Court concluded that the SEC’s requests for voluntary cooperation in furtherance of its pre-suit discovery was an “investigation,” not an “administrative or regulatory proceeding,” and the company’s expenses incurred after the receipt of the SEC letters were excluded from coverage.

Second, Office Depot contended that the policy’s language relating to the indemnification of Insured Persons covered the losses it incurred as a result of the SEC’s investigation. Specifically, Office Depot argued that the letters from the SEC in 2007 it received starting in 2007 triggered a Claim under the policy. The Court explained that the SEC’s letters asked Office Depot to preserve certain documents and requested that several individuals provide testimony. Those letters, according to the Court, only broadly requested information to assist the SEC in determining whether there had been securities violations and did not allege that violations had occurred or identify specific individuals that could be charged in future proceedings.  However, the Wells Notices, which stated that the SEC staff “intend[ed] to recommend that the Commission bring a civil injunction" against a specific individual alleging securities violations, did trigger a claim (which was conceded by the Carriers). As a result, the Court concluded that the pre-Wells Notice expenses were not covered under the indemnification language.

Third, Office Depot argued that the language of the policy does not explicitly exclude the investigation costs for potential claims. The Court agreed, but concluded the text unambiguously limits Defense Costs to those costs incurred after a Claim has been made – the plain language demonstrated that the costs must “result[] solely from” a Claim.

Finally, Office Depot argued that the language of the policy allowed a Claim to “relate back” to the date the insured filed the original notice of circumstances such that any costs incurred between the notice of circumstances and the date a Claim was made, so long as they are both based on the same facts. The Court concluded the policy does not cover the costs incurred between the filing of the initial notice of circumstances and the time a Claim is triggered. Nothing in the policy extended coverage to Defense Costs incurred after a notice is filed, but before a Claim actually exists.


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