Delaware Court Ruling Expands Insurance Coverage for Government Investigations

In a significant decision strengthening policyholder rights, a Delaware court recently ruled that companies can secure insurance coverage for costs incurred while responding to Department of Justice civil investigative demands (CIDs), even when policies contain limited provisions for government investigations.

The ruling in The Cigna Group v. XL Specialty Insurance Co. case adds to Delaware’s growing reputation as a business-friendly jurisdiction for insurance coverage disputes, particularly those involving directors and officers (D&O) and errors and omissions (E&O) liability policies.

The case centered on a healthcare company seeking coverage under its managed care E&O policy for expenses incurred while responding to a DOJ civil investigative demand related to potential False Claims Act violations. Cigna argued the CID constituted a covered “Claim” under its policy, which defined claims as “any written notice received by [the company] that a person or entity intends to hold [the company] responsible for a Wrongful Act.”

Insurance carriers contested this interpretation, maintaining that the CID was merely a “Governmental Investigation” rather than a “Claim” because it didn’t explicitly convey an intent to hold Cigna responsible for wrongdoing. This distinction was crucial since the policy excluded coverage for governmental investigation expenses.

The Delaware Superior Court ultimately sided with Cigna, ruling that the CID qualified as a covered claim. The court determined that “a government CID seeking information to investigate specific alleged wrongdoing by the recipient demonstrates an intent to hold the receiver responsible for that conduct.”

This decision builds upon previous pro-policyholder rulings in Delaware. In 2019, a Delaware court held that a CID issued by the Texas Attorney General constituted a claim “alleging a wrongful act.” A subsequent ruling established that government entities initiate claims simply by imposing their authority on insureds, who cannot decline to cooperate without risking sanctions for the very matters under investigation.

“Delaware continues to establish itself as a jurisdiction that takes a broad view of what constitutes a covered claim under management liability policies,” said Sarah Goldstein, insurance coverage attorney at Morgan Lewis. “This decision is significant because it prevents insurers from avoiding coverage by categorizing investigative actions as something less than claims.”

The court rejected insurers’ argument that interpreting “Claim” to include CIDs would render the policy’s separate definition of “Government Investigation” meaningless. It explained that the policy “still applies to CIDs that do not become Claims,” such as when a policyholder receives a CID investigating a competitor’s practices rather than its own conduct.

Although the court found the CID constituted a claim, it stopped short of immediately ordering reimbursement. Instead, it directed insurers to review Cigna’s defense costs within 45 days and identify any contested amounts, refusing to accept that mere payment of costs automatically established their reasonableness.

The ruling holds particular significance amid increasing regulatory scrutiny across industries. With whistleblower filings under the False Claims Act reaching historic highs and government recoveries exceeding $6.8 billion in the last fiscal year, companies face growing exposure to government investigations.

This case highlights the importance of carefully examining policy language, particularly “claim” definitions, even when policies include express investigation coverage provisions. Policyholders should understand all potential coverage triggers and challenge attempts to exclude investigations from coverage when such exclusions contradict policy language.

Delaware’s approach recognizes the inherent power differential between government agencies and businesses. The court noted that recipients of CIDs cannot refuse compliance without risking civil or criminal liability, making distinctions between “investigations” and “claims for wrongful acts” largely meaningless in practice.

For businesses nationwide, the ruling underscores why Delaware remains a preferred incorporation jurisdiction, adding favorable insurance coverage jurisprudence to its list of corporate benefits.