Viewpoint: 11th Circuit Holds No Obligation to Defend Against DOJ Antitrust Investigation

On July 23, the U.S. Court of Appeals for the Eleventh Circuit, in Crowley Maritime Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA held that, because Crowley Maritime Corp. failed to provide timely notice of a claim, National Union Fire Insurance Co. of Pittsburgh, PA did not have an obligation to cover $2.5 million in defense costs incurred in defending an executive against a DOJ investigation involving market allocation and price-fixing.

Discussion

Crowley is an Ocean freight carrier that carried freight between the United States and Puerto Rico. On April 16, 2008, an FBI special agent signed and delivered an affidavit in support of a search warrant to a federal magistrate judge. The affidavit detailed that Crowley’s executive, Thomas Farmer, and others were allocating customers and coordinating prices in violation of antitrust law. The affidavit was kept sealed, to protect the ongoing investigation. The following day a search warrant was executed at Crowley’s headquarters. The search warrant did not reveal the affidavit’s allegations. Crowley and Farmer also received subpoenas to appear before a grand jury.

On April 25, 2008, Crowley’s broker provided notice to National Union. Specifically, it provided “details of a DOJ/FBI investigation,” including a statement that “[t]he charges that may have [led] to the subpoena and search warrant are sealed at this point in time and no indictments have been filed.” National Union advised that Crowley’s D&O policy was not triggered because no one was identified in writing as a target of the investigation as required by the policy’s definition of a “claim.” Therefore, it considered the matter a notice of circumstances (NOC) that could give rise to a claim and denied Crowley’s request for defense counsel.

Crowley initiated arbitration in December 2012. An arbitration panel considered the search warrant, subpoenas, documents related to a plea agreement, and the investigation relating to these materials. The affidavit was not considered because it remained sealed. The arbitration panel concluded that the policy was not triggered, reasoning that “the triggering event for a ‘claim’ … is when the DOJ identifies in writing an Insured Person as one against whom a criminal proceeding may be commenced.”

In February 2013, the government offered Farmer a plea deal. Crowley notified National Union of the plea deal, and National Union agreed to treat the FBI/DOJ investigation as a claim under the policy as of February 18, 2013. National Union agreed to provide future defense costs, but maintained its denial with respect to defense costs incurred between 2008 and 2013.

Farmer ultimately rejected the plea deal. Before the end of Farmer’s trial, on April 24, 2015, the affidavit was unsealed. Crowley subsequently advised National Union that the affidavit made clear that a claim had been asserted against Farmer as of April 2008 and demanded reimbursement of $2.5 million in defense costs incurred between 2008 and 2013. National Union denied Crowley’s demand.

The D&O policy period was effective November 1, 2007 to November 1, 2008, but Crowley obtained runoff coverage through November 1, 2013. A claim included a criminal investigation of an insured person once such insured person is identified in writing by such investigating authority as a person against whom a proceeding may be commenced.

According to the court, the affidavit’s substantive content constituted a claim, but it refused to opine on whether a claim was first made against Farmer in April 2008 or 2015. Even assuming a claim was first made against Farmer in April 2008, the court reasoned that it was not properly reported per the policy’s requirements. The policy had three methods to report a claim. One involved direct reporting of a claim; the second involved reporting a subsequent claim relating to an earlier claim previously reported; and the third involved reporting a claim relating to an earlier set of circumstances previously reported.

The court held that Crowley’s reporting of the claim based on the affidavit was untimely. First, it reasoned that Crowley was bound by the arbitration panel’s determination that it did not report a claim as of December 31, 2012. As such, the only time period Crowley could report a claim based on the affidavit was between January 1, 2013 and November 1, 2013. Second, the court reasoned that Crowley expressly waived any argument that Crowley’s 2015 notice should relate back to the April 2008 notice. As such, the only method by which it could report the claim based on the affidavit involved direct reporting of a claim. However, Crowley reported the claim based on the affidavit in 2015, which was after November 1, 2013. Because of this, Crowley was not entitled to coverage under the policy for the $2.5 million in defense costs.

Conclusion

It is common for courts to analyze claims made and reporting requirements under D&O policies. The Crowleycase illustrates that courts will enforce the definition of a claim in such a policy involving a government investigation as unambiguous. This is important because coverage disputes abound regarding whether government investigations trigger coverage under D&O policies and, if so, at what point during an investigation. Despite the affidavit being prepared in 2008, and detailing allegations sufficient to constitute a claim, it remained under seal. This proved fatal in Crowley, as Crowley lacked sufficient information to satisfy the definition of a claim and directly report it during the policy period. It is worth noting, however, that Crowley expressly waived any argument that its 2015 notice should relate back to the April 2008 NOC, such that it would be considered made and reported within the policy period. As such, it is unclear how the court would have ruled if it considered this relation back argument.