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January 10, 2022 Insurance Coverage Litigation Committee

Subpoena Colada: Federal Court Decision on Subpoena Defense Costs Blends Up a New Recipe on the Scope of the Duty to Advance Defense Costs

William R. Reed

A business is having a terrible, horrible, no good, very bad day when a government subpoena arrives for a criminal investigation into the business or its leaders.  Fleeing to Australia is rarely an available or advisable option, so the defense begins and costs mount quickly.  But will the business receive coverage for those defense costs from its management liability insurer

That’s the question confronted in the recent decision Connecticut Municipal Electric Energy Cooperative v. National Union Fire Ins. Co., No. 3:19-CV-00839, 2021 U.S. Dist. LEXIS 173998, 2021 WL 4170757 (D. Conn. Sept. 14, 2021) [hereinafter “CMEEC”].  In reaching the holding that there is no management liability coverage for defense costs incurred in responding to two federal subpoenas targeting directors/officers, the court wrestled with broader issues on (1) the scope of the duty to advance defense costs and (2) what qualifies as a covered claim. The ruling also underscores the inescapable importance of the specific policy language in dispute.

The CMEEC court stepped into a quagmire of mixed precedent on defense cost coverage for subpoenas involving government investigations.  On one side, many courts (especially state courts) hold that directors and officers (D&O) policies do provide coverage for defense costs when a business faces such a subpoenaOn the other side, many courts (especially federal courts) hold that no coverage exists.

Details of the CMEEC Case

CMEEC is a state-chartered umbrella entity whose members are the municipal electric utilities providers for several cities in Connecticut.  The U.S. Attorney’s Office for the District of Connecticut issued two federal grand jury subpoenas to CMEEC in 2016 and 2017, first seeking production of documents related to personnel’s attendance at several annual retreats and then seeking information on CMEEC’s board members and governance documents.

Following a two-year investigation, the grand jury indicted five individuals, who were all officers or directors of CMEEC, alleging self-dealing from CMEEC funds for lavish trips, expenses, and compensation.  The criminal fraud cases are ongoing.

CMEEC retained counsel to guide the subpoena responses and sought reimbursement under its management liability coverage.  National Union denied coverage on the basis that neither subpoena constituted a “Claim” as defined under the D&O policy to mean a written demand or a criminal proceeding for nonmonetary relief.  CMEEC brought suit and the coverage question on subpoena defense costs came to a head following the parties’ summary judgment motions.

The policy’s defense costs consent provision contains language that was key to the court’s ruling:

The Insurer does not assume any duty to defend. The Insureds shall defend and contest any Claim made against them. . . .[Insurer shall advance defense costs.] The Insureds shall not . . . incur any Defense Costs without the prior written consent of the Insurer. Only those . . . Defense Costs which have been consented to by the Insurer shall be recoverable as Loss under the terms of this policy. The Insurer’s consent shall not be unreasonably withheld, provided that . . . in all events the Insurer may withhold consent to any . . .  Defense Costs . . . to the extent such Loss is not covered under the terms of this policy.

The CMEEC court recognized that the insurer did not assume a duty to defend and concluded that a duty to advance defense costs is not equivalent to a duty to defend.  Relying primarily on the policy’s consent provision language that the insurer may withhold defense costs if the loss is not covered, and distinguishing contrary authority, the court determined that the duty to advance defense costs arises only where the loss is actually covered.

The next logical question was whether the underlying loss was covered.  The court found no coverage because the subpoena was not a claim for a wrongful act of the organization itself, and CMEEC failed to prove it was the target of the investigation.  The policy, according to the court, provided defense costs coverage only for claims directly against the organization.   


Scope of the Duty to Advance Defense Costs

Courts struggle to define the scope of the duty to advance defense costs.  The scope of the duty has been defined primarily by analogy to two duties with well-settled parameters – the duty to defend and the duty to indemnify.  In broad terms, the insurer must assume the duty to defend where the allegations trigger the possibility of coverage; whereas, the insurer must assume the duty to indemnify only where the loss is actually covered, which often can be determined only after adjudication of the underlying liability.  Most courts have equated the duty to advance defense costs with the duty to defend.

However, among courts deciding the scope of the duty to advance defense costs where the policy disclaims a duty to defend and retains the insurer’s right to consent to costs, a Goldilocks solution emerges: the duty to advance defense costs arises where there is a reasonable possibility of coverage.  Courts have staked out this middle ground – between the “any possibility” of coverage standard and the “actually covered” standard – in an attempt to satisfy the tension inherent in these policies.  On one hand, the duty assumes that the insurer will “advance” costs to the policyholder while the underlying matter is ongoing and, in some cases, before actual coverage can be determined.  The policyholder is bargaining for coverage to fund a robust defense.  On the other hand, the insurer carves out the discretion to consent to the costs, and the option to withhold consent with a reasonable basis.  The reasonable possibility of coverage standard, several courts reason, gives effect to both the nature of the duty and the consent provision

Nevertheless, the CMEEC court went in a different direction by essentially adopting a duty to indemnify standard (actually covered) to trigger the duty to advance defense costs.  This holding could potentially reverberate through defense costs cases, even outside the context of subpoenas.  However, the court based its ruling on the specific language of the policy’s consent provision, which states that the insurer may withhold consent if the loss is not covered.  It remains to be seen whether the reasoning in the CMEEC decision will be limited to this precise policy language.

Covered Claim

The dispositive coverage question for subpoena defense costs is typically whether the subpoena qualifies as a covered claim, as analyzed through the lens of the scope of the duty to advance defense costs.

On this question, the definition of “claim” is crucial.  Two salient issues emerge as courts try to square the realities of a subpoena issued for a government investigation with the definition of a claim – the relief and the target.

First, does a subpoena demand nonmonetary relief?  Again, courts diverge.  In one sense, a subpoena is merely a discovery device that does not seek any particular reliefBut, in another sense, a subpoena seeks the production of documents or testimony as a form of relief and failure to comply would result in legal action for enforcement.  The CMEEC court noted the different points of view and left this issue undecided.

Second, does a subpoena constitute a claim against the policyholder?  In other words, to meet the definition of a claim, must a policyholder prove it is the target of the investigation or merely be served with the subpoena?  For good reason, the government investigator may not be inclined to divulge the true target of the subpoena or the exact nature of the suspected wrongdoing.  Years may pass with significant defense costs expended by the time an organization knows whether it (or covered directors/officers) is the target of the investigation.  Unlike the CMEEC court, which found the policyholder failed to show it was the target of the investigation, many courts hold that receipt of the subpoena is enough to constitute a claim against the policyholder.

The Coverage Analysis Framework

As seen in CMEEC, the scope of the duty to advance defense costs percolates down through a court’s analysis of whether a subpoena is a covered claim. The scope of the duty controls the timing of the analysis as well as the standard.  The duty to defend is usually analyzed at the point in time the claim is made, while the duty to indemnify analysis enjoys the benefit of hindsight.

For example, in most cases, when an entity receives a subpoena issued for a government investigation into criminal acts, it is reasonably possible the government will target the organization; in a narrower set of cases, the government is actually targeting the organization for criminal charges.  The CMEEC court determined that the subpoenas did not qualify as a covered claim, in part, because the investigation did not target the organization, but this was not known for certain until a two-year investigation culminated in indictments against five individuals.  Two years earlier, when CMEEC received the first federal subpoena and began incurring defense costs, it was reasonably possible that the organization could be a target and thus qualified for coverage.   

One of the prickly questions arising from the CMEEC court’s conclusion on the scope of the duty to advance defense costs is what happens when actual coverage for the loss cannot yet be determined.  Does the policyholder lose its bargained-for coverage to fund the ongoing defense or does the insurer lose its bargained-for right to withhold consent until actual coverage for the loss is determined?  The reasonable possibility of coverage standard may offer a more workable solution to this conundrum, but does so by generally adopting a duty to defend analysis framework for the duty to advance defense costs.  Although the CMEEC court did not confront this issue, a duty to indemnify framework for defense costs may run into practical difficulties where actual coverage cannot yet be determined.   


The CMEEC decision underscores the fundamental lesson than an insurance policy is a contract and the language of the parties’ agreement matters.  The definition of claim controls the variety of risks assumed.  The consent to defense costs provision may control the scope of the duty being assumed.  Policyholders and insurers will want to pay attention to these provisions on the front end.

    Will Reed

    Sherman & Howard L.L.C.

    Will Reed is a senior associate in the insurance recovery practice group at Sherman & Howard L.L.C. He represents commercial policyholders in disputes against their insurers.

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