On October 15, 2010, the United States District Court for the Southern District of Florida released a Decision in Office Depot, Inc. v. National Union Fire Insurance Company.
The District Court held that the costs incurred by Home Depot in voluntarily responding to a Securities Exchange Commission (SEC) investigation were not covered by an organization and executive liability insurance policy.
The SEC investigation was triggered by a whistleblower complaint about accounting irregularities relating to the timing of Office Depot’s recognition of certain vendor rebate program funds. Substantial legal and investigation costs were incurred by Home Depot in responding to, and settling with, the SEC, as well as in conducting its own internal investigation and audit. During the SEC informal inquiry, subpoenas were issued to 8 current or former employees that contained allegations of wrongful conduct but did not name any specific director or officer. The SEC investigation was did not result in the filing of a judicial or administrative complaint against Office Depot or its directors and officers.
Office Depot had claimed reimbursement for over US $23 million in legal fees and expenses from its insurers.
In concluding that there was no coverage for the claim, the District Court considered the definitions of “Securities Claim”, “Claim”, “Defence Costs” and “Loss” in the insurance policy. The District Court found that these terms did not cover the costs of investigating a potential claim, including pre-suit or pre-claim legal costs.
The Decision confirms the importance of paying close attention to terms such as “Claim” and “Loss” as defined in executive risk insurance policies so as to fully appreciate the scope of coverage being provided by a D & O insurer.