Four years of high school Latin plus one in college equals one murky memory of the dead language. Subpoena is a Latin term (meaning, "under penalty") that risk managers often encounter. Subpoenas and deposition notices often cause risk managers to report them to insurers as notices of claims. Subpoenas or notices of depositions are not technically demands for monetary damages. If pressed on the issue, most adjusters would likely define a claim as a demand for monetary damages. (Interestingly, many insurance policies do not define the word claim.) Whether this creates an ambiguity is debatable. A hazard for insurers is that the lack of definition may muddy the waters enough that an insured could argue that a subpoena or a deposition notice are de facto claims.
Insurers disclaiming coverage may concede that both are legal documents but argue that they are not demands for any kind of damages. Yes, the documents "smell" like things that are claim-related. Companies may receive subpoenas or deposition notices as part of the discovery process in cases that are already in court, litigation that does not yet involve the entity receiving the subpoena or deposition notice. The operative word is yet, since once a fishing expedition starts, creative attorneys may find enough to later add the subpoena or deposition recipient as an additional party to the lawsuit. At this point, the matter is undoubtedly a claim, triggering an insurer's duty to defend.
Horns of a Dilemma
One quandary is that how deftly a subpoena or deposition notice is handled can determine a firm's subsequent involvement in a claim or suit. Handled sloppily, a subpoena or deposition notice can lead opposing counsel to find there is enough to add the company to the lawsuit. Handled deftly, the subpoena or deposition notice may not lead to any "ammo" that draws the risk manager into litigation as a defendant.
One interesting coverage case is Catholic Health Services of Long Island, Inc., v. National Union Fire Ins. Appellate Division, Second Department. Here the court wrestled over whether responding to a regulatory subpoena was a "claim" under a D&O (government liability) policy. The plaintiff spent more than $2 million on an Attorney General investigatory subpoena, arguing that it was a "claim" as defined in a government liability policy (basically, a D&O policy with a government focus). Was the response an answer to a "claim"? The Appellate Division did not answer, finding that the plaintiff was not an insured under the policy and therefore the question need not be answered.
In D&O policies, courts have sometimes treated subpoenas as notices of loss. Example: Polychron v. Crum & Forster Ins. Cos., 916 F.2d 461 (8th Cir. 1990). In September 1984, the insured bank was subpoenaed by a federal grand jury investigating potential fraud suspected to have been committed by an officer. The subpoena only sought documents. Ten days later, the officer was questioned by the U.S. Attorney and two IRS agents. The D&O policy expired in July 1985. In August 1986, the officer was indicted. After a lengthy trial, he was acquitted of all charges.
The acquitted officer sought reimbursement for his criminal defense costs under a D&O policy, which he argued was triggered by the 1984 subpoena. On these facts, the District Court held that the Sept. 1984 subpoena was not a "claim" under the D&O policy, but the Eighth Circuit reversed and held that it was indeed a claim. Despite the holding in Polychron, many legal observers view the opinion as an "outlier" and not representative of the way the undefined word claim in a policy is usually interpreted.
The "Duck" Test
To many policyholders, a subpoena or a deposition notice "smells" like a claim, so they report it to insurers as losses. These documents seem to pass the "Duck Test" – i.e., they walk like a duck, quack like a duck, smell like a duck, etc. Seems like a legal-type document, like a Summons and Complaint. One can imagine a company reasoning: "Moreover, if we ignore it or bungle its handling, maybe we could be facing a claim down the road. Might as well send it to the insurance company to handle, right?"
Adjusters receiving such notices are conflicted, though. If there is no claim of negligence, defect, nor any demand for money damages (just a demand for testimony, time, or documents), this may not qualify as a claim. If it does not qualify as a claim, it triggers no coverage duty or duty to defend. Informing insureds of this will likely annoy them and prompt them to see insurers as evading their coverage obligations.
By contrast, if the adjuster accepts coverage and sets up a claim file, he or she may be second-guessed by higher-ups. Having legal counsel cover the deposition or respond to a subpoena will cost money, likely not a lot of money, but money nonetheless. Why should the insurance policy absorb expense on a non-covered matter? Making the insured happy may require stretching the insurance policy to uncomfortable lengths.
Further, if claim reps make an exception for one insured but not for another, they have discriminated. Bending the rules for a policyholder because, (a) it's a long-standing insured, (b) it is a big premium payer, or (c) its broker produces a lot of business for the company smacks of discriminatory practice. This could support a market conduct complaint to the state insurance commission. What if a complaint is lodged by an insured whose similar matter is denied? If a determined insured forces the issue, discovery into the carrier's claim practices may reveal that the insurer treated certain policyholders favorably and other insureds differently, not based on anything in the policy but rather based on "political" factors.
Recommendations for Risk Managers
So what are risk managers to do? Here are three tips.
- Report the subpoena or notice of deposition to your insurer. At least put the carrier in the position where it must decide whether or not to handle as a covered loss. Who knows? Maybe the carrier will handle it as a claim or they will handle subject to a reservation of rights letter.
- If the insurer denies coverage, assess whether the rationale offered makes sense. If not, contest the denial and make your best case. If the reason makes sense, go ahead and hire an attorney on your own to handle the subpoena or to cover the deposition. You can always reserve rights against your insurer, saying that you may later come back to them to cover or reimburse you for the legal fees incurred in responding to these items.
- Even if the insurer will not cover the costs of responding to these, see if the carrier can recommend to you counsel for you to engage. There may be advantages in doing this. First, the insurer may have negotiated favorable billing rates with such counsel. Perhaps you can qualify for such rates as a courtesy, even on an assignment that is outside the orbit of coverage. Second, if the matter later morphs into a claim or lawsuit, the expenses from that point on may be covered; the carrier can begin handling the claim with a firm that is already familiar, a known quantity.
Uncertainty over insurance coverage should not paralyze risk managers into inactivity when they receive subpoenas or deposition notices. Risk managers should not get so caught up in obsessing over coverage that they wrap themselves around the proverbial axle. Handle the subpoena or depo notice. Do not ignore them. Get them into the hands of legal counsel. Promptly!
Haggle later if you must over insurance coverage or credit for expenses. Do not lose sight of the main thing but do not hesitate to notify your insurer. Throw it up against a wall–it might just stick. If it doesn't "stick," handle the subpoena or depo notice adroitly and maybe there will be no claim after all. Isn't that enough of a reward in itself?
Insurance claim executive and author Kevin Quinley has helped thousands of claim professionals boost their productivity. Visit his new blog, THE CLAIMS COACH, at http://claimscoach.blogspot.com. Get your free monthly productivity newsletter, CLAIMS CAFFEINE, by emailing claims_caffeinesubscribe@yahoogroups.com or kquinley@cox.net.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.