Criminal Defense Lawyers

SEC Defense Costs Insurance Coverage

SEC investigations are expensive. Really expensive. Mid-seven-figure legal bills are common. Eight-figure bills happen in complex cases. Every witness needs preparation. Many witnesses need individual counsel. Document review takes thousands of hours. And this goes on for years. The question of who pays for all this – and how much insurance actually covers – is something most executives don’t understand until they’re staring at invoices that exceed their policy limits.

The short answer is: your D&O insurance probably covers some of it. But “some of it” hides a lot of complexity. Defense costs for individual officers and directors are usually covered. Defense costs for the company itself are often not covered. And here’s the thing that really gets people – in most D&O policies, your defense costs ERODE your policy limit. Every dollar you spend on lawyers is a dollar less available for settlement or judgment. You can spend so much defending yourself that there’s nothing left to actually resolve the case.

This isn’t a minor technical detail. This is the difference between having meaningful protection and having insurance that disappears right when you need it most.

Defense Within Limits – The Coverage That Eats Itself

Most D&O and professional liability policies are written on a “defense within limits” basis. This is sometimes called an “eroding limits” policy, and the name tells you exactly what it does.

Here’s how it works. You have a $10 million D&O policy. The SEC opens an investigation. Your defense costs – lawyer fees, document production, testimony prep, expert witnesses – start accumulating. Those costs get deducted from your $10 million limit.

By the time the SEC issues a Wells notice and your considering settlement, youve spent $4 million on defense. Your $10 million policy now has $6 million available. The SEC wants $8 million to settle. You don’t have enough coverage left.

This happens constantly. Companies buy D&O insurance thinking they have $10 million or $25 million in protection. They dont realize that every invoice from there lawyers shrinks that protection. A long, aggressive defense can consume the entire policy limit before any settlement or judgment.

The alternative is “defense outside limits” coverage, where defense costs are paid seperately and dont reduce your policy limit. But this is rare in D&O policies. Its more common in general liability policies. Most professional liability coverage – D&O, E&O, professional liability – uses defense within limits. Your coverage shrinks as you fight.

WARNING: Most D&O policies have “defense within limits” – meaning your defense costs ERODE your policy limit. A $10M policy can shrink to $3M or less by the time you need to settle.

The Three Sides of D&O Coverage

D&O insurance isnt a single thing. Its actualy three different types of coverage bundled together, each covering different situations. Understanding the difference matters enormously for SEC investigations.

Side A – Direct Coverage

Side A provides direct coverage to individual directors and officers when the company cannot indemnify them. This happens in two situations:

• When the company is insolvent (bankrupt, cant pay)
• When indemnification is legally prohibited (derivative suits, certain regulatory matters)

Side A is the executive’s last line of defense. Even if the company goes under, Side A coverage protects there personal assets. For SEC investigations, this matters if the company lacks resources to pay defense costs or if the SEC bars the company from indemnifying individuals.

Side B – Corporate Reimbursement

Side B reimburses the company when it indemnifies its directors and officers. The company pays defense costs first, then seeks reimbursement from insurance. Most SEC investigation defense costs flow through Side B when the company is indemnifying its executives.

The key here is that Side B is balance sheet protection for the company. The executive gets defended, but the company initially fronts the money and then gets reimbursed. This matters for cash flow during a long investigation.

Side C – Entity Coverage

Side C covers claims against the company itself, not just its officers and directors. But heres the problem – entity coverage for SEC investigations is often limited or excluded entirely. D&O insurers routinly deny coverage for company investigation costs. Courts usually agree with the insurers.

So when the SEC investigates your company, Side C may not help. Individual executives may be covered under Side A or B, but the companys own defense costs? Probly not covered unless you purchased specific entity investigation coverage as an add-on.

The Retention Problem

Before any insurance kicks in, you have to meet the retention – basicaly a deductible. D&O retentions vary widely: $100,000, $500,000, $1 million, even higher for large companies.

This creates a gap that surprises people. The SEC subpoenas three executives for testimony. Each needs individual counsel for preparation. Legal costs total $350,000. But your retention is $500,000. Insurance pays nothing because costs didn’t exceed the retention.

The irony is that smaller, more manageable investigations often fall completely below the retention threshold. The company absorbs every dollar. Its only when investigations become massive – ten or more witnesses, years of document production, complex litigation – that costs exceed retention and insurance actualy helps.

Different sides of the policy may have different retentions too. Side A (individual protection) might have a lower retention then Side B (company reimbursement). You need to understand both.

The “Insured Persons” Limitation

D&O coverage is only available for “insured persons” as defined in the policy. This sounds obvious but it creates real problems in SEC investigations.

Who counts as an insured person? Directors and officers, certainly. But what about:

• The VP who processed the suspicious trades?
• The compliance analyst who signed off on the disclosure?
• The mid-level manager who sent the problematic emails?

In a wide-reaching SEC investigation, the government may want to interview ten, fifteen, twenty or more employees. Not all of them qualify as “insured persons” under a typical D&O policy. There costs might not be covered at all.

And heres another issue: even if someone is an insured person, there testimony prep costs are only covered if there being interviewed in connection with a covered claim. The policy language matters. The definition of “claim” matters. The timing of when coverage triggers matters.

Advancement vs Reimbursement

This is one of the most important distinctions in insurance coverage, and its often overlooked when companies buy policies.

Advancement means the insurer pays defense costs as they’re incurred, on an ongoing basis throughout the investigation. You submit invoices, the insurer pays, and the investigation continues.

Reimbursement means you pay defense costs upfront, and the insurer reimburses you after the case concludes – sometimes years later.

The cash flow difference is enormous. An SEC investigation lasting three years might generate $5 million in legal fees. Under an advancement policy, the insurer covers those costs as they arise. Under a reimbursement policy, the company fronts $5 million and hopes to get it back eventually.

For many companies, reimbursement policies create impossible situations. They dont have $5 million in cash to front for legal fees. They cant adequately defend themselves. The investigation outcomes suffer becuase they couldnt afford proper representation.

Courts have ordered insurers to advance costs when policy language requires it. But if your policy dosent have advancement provisions, your stuck with reimbursement. Check your policy now, before you need it.

The SEC Anti-Indemnification Trap

Here’s something that catches executives completely off guard: when you settle with the SEC, the settlement agreement often prohibits you from seeking insurance reimbursement for the penalty portion.

The standard SEC settlement language says the defendant “shall not seek or accept, directly or indirectly, reimbursement or indemnification from any source, including but not limited to payment made pursuant to any insurance policy, with regard to any civil penalty amounts.”

Read that carefully. You cannot recover the penalty from insurance. Period. The SEC explicitly blocks it.

This means your insurance might cover defense costs but NOT the settlement payment. You spend $3 million on lawyers (covered by insurance, minus retention). The SEC settles for $5 million in penalties. That $5 million comes out of your pocket – insurance cant help even if you have coverage remaining.

The penalty anti-indemnification provision is standard. Its in virtually every SEC settlement. And it means executives who thought insurance would cover everything discover that the biggest number – the actual penalty – is explicitly excluded.

CRITICAL: SEC settlements typically prohibit seeking insurance reimbursement for penalty amounts. Defense costs may be covered, but the settlement payment itself usually cannot be recovered from insurance.

What Happens When Multiple Claims Hit

SEC investigations often trigger other claims:

• Shareholder derivative suits
• Securities class actions
• State regulatory inquiries
• Customer complaints

Each of these might be a seperate “claim” under your D&O policy – or they might all be “related” and collapse into one.

If there related claims, they share policy limits. Your $10 million D&O policy covers the SEC investigation, the shareholder suit, and the derivative action – all from the same $10 million. After defense costs eat $4 million, you have $6 million to resolve multiple matters.

And remember, related claims are dated back to the first claim. If the SEC investigation started in 2022 but the class action was filed in 2024, the class action relates back to 2022. Coverage comes from the 2022 policy, not the 2024 policy. You might have increased limits in 2024 that don’t apply because everything collapsed onto the earlier policy.

This is were sophisticated insurance planning matters. Understanding how claims interact, how limits erode, how related claims doctrine works – all of this affects how much protection you actualy have when multiple proceedings hit simultaneously.

Individual Counsel Costs

One often-overlooked aspect of SEC investigation defense costs: individual counsel.

When the SEC investigates a company, employees get interviewed. But company counsel represents the company, not the individuals. Employees may need there own lawyers – especially if:

• There interests might diverge from the companys
• They might become targets
• They need Fifth Amendment advice

Individual counsel for ten executives, each preparing for and attending SEC testimony, can easily cost $1-2 million. Add the companys own counsel, document production costs, expert fees, and you quickly reach the seven-figure range even before any formal charges.

D&O policies typically cover individual counsel for officers and directors. But coverage for other employees is limited. And even covered costs are subject to retention, within-limits erosion, and “insured persons” definitions.

The Tower Problem – When One Policy Isnt Enough

OK, so here’s where the insurance gets really complex, and where most executives’ eyes glaze over. But this matters becuase its how large companies actualy structure there protection.

Many companies dont have just one D&O policy. They have multiple policies stacked in layers – what insurance professionals call a “tower.” The primary policy might have $10 million in limits. Then theres an excess policy that kicks in after the primary is exhausted. Then another excess policy above that. And sometimes another above that.

A tower might look like:

• $10 million primary
• $15 million first excess
• $25 million second excess
• Total theoretical coverage: $50 million

Sounds great. Heres the problem. Each layer has its own terms, its own exclusions, its own retention requirements. The excess layers don’t automatically follow the primary policys’ terms. They might have different definitions of “claim.” They might have different positions on SEC investigations. They might deny coverage for things the primary covers.

And theres the coordination issue. When your primary is exhausted, the first excess needs to step in seamlessly. But insurers dispute exhaustion. They dispute whether the underlying policy was properly triggered. They dispute allocation between covered and non-covered claims. Meanwhile your investigation continues and legal bills pile up.

Think about what this means in practice. You’re facing an SEC investigation that’s going to cost $35 million to defend. You have a $50 million tower. Sounds like plenty. But by the time you fight with three different insurers about coverage, exhaust your primary, argue about whether the first excess is triggered, deal with the second excess insurer denying your claim entirely – your actualy defending yourself with significantly less then $50 million in real coverage. The tower looks impressive on paper. The reality is messier.

The Timing Trap Nobody Explains

Heres something that destroys coverage more then anything else: timing.

D&O policies are “claims made” policies. Coverage applies to claims first made during the policy period. Not when the underlying conduct happened. Not when the investigation started. When the “claim” as defined in your policy actualy arrives.

If an SEC subpoena arrives on December 15 and your policy renews on January 1, the subpoena falls under the old policy, not the new one. Even if the entire investigation happens in the new policy year. Even if you increased your limits in the new policy specificaly becuase you knew an investigation was coming.

This gets worse with related claims. If anything “related” to that December 15 subpoena happens later – a Wells notice, an enforcement action, a class action lawsuit – it all relates back to December 15. All of it falls under the old policy. Your new, higher limits? Irrelevant.

Look at what happened to companies that saw trouble coming and tried to increase coverage. They bought more insurance in January. The SEC issued a subpoena in February. They filed a claim thinking they had the new, higher limits. The insurer pointed out that informal inquiries had begun the previous year. Everything related back. The new coverage didnt help at all.

The insurers call this “prior knowledge” and “prior acts.” If you knew about potential problems when you bought the policy, those problems may be excluded. If the underlying conduct happened before the policy started, it may not be covered even if the claim arrives during the policy period. Timing determines everything.

The Document Production Black Hole

Here’s where costs actually pile up, and where insurance coverage gets tested: document production.

SEC investigations involve massive document requests. The SEC wants:

• Every email
• Every text message
• Every trade confirmation
• Every compliance memo
• Every board minute

They want it organized, searchable, with privilege logs. They want it yesterday.

Document review costs are astronomical. At $50-100 per hour for contract reviewers, plus technology costs, plus attorney oversight, a large document production can cost $2-3 million easily. Complex cases can hit $10 million just in document production.

Is document production covered by your D&O policy? Maybe. Probably not for the company itself – that’s entity coverage, which is often excluded for investigations. Possibly for individual officers if the production relates to claims against them specifically. But the allocation gets complicated fast.

Insurers argue about what constitutes “defense costs” versus “compliance costs.” Responding to an SEC subpoena – is that defending yourself, or is that just complying with a regulatory requirement? The distinction matters because defense costs are covered (maybe) while compliance costs aren’t.

This is were coverage disputes happen. The company spends $4 million on document production thinking its covered. The insurer says $3 million of that was compliance with regulatory requirements, not defense. Only $1 million is covered. The company is stuck with a $3 million surprise bill.

What You Should Actually Do

Stop assuming your D&O policy provides adequate protection for SEC investigation defense costs. It might. It might not. The specifics matter enormously.

Check whether your policy is defense within limits or defense outside limits. If its DWL (which it probly is), understand that your coverage shrinks with every legal invoice.

Understand the retention for each type of coverage. Side A retention may differ from Side B. Individual coverage may differ from entity coverage. Know what costs you absorb before insurance kicks in.

Verify that your policy has advancement provisions, not just reimbursement. Advancement means cash flow support during the investigation. Reimbursement means you front everything and hope to recover later.

Look at who qualifies as an “insured person.” Does it include the mid-level employees who might get subpoenaed? Or just directors and officers?

Ask about entity investigation coverage. Standard D&O often excludes company investigation costs. You may need to purchase this seperately as an endorsement.

Understand how related claims work. If the SEC investigation triggers a class action, both might share the same limits from the same policy year.

And remember: SEC penalties cannot be recovered from insurance regardless of your coverage. The settlement anti-indemnification language blocks it.

This matters. Defense costs in SEC investigations routinely reach seven or eight figures. Having adequate coverage – and understanding what that coverage actualy provides – is the difference between financial survival and devastation. Every year companies discover that there $10 million or $25 million D&O policy actualy provides far less protection then they assumed becuase of defense-within-limits erosion, entity coverage exclusions, and related claims collapse.

Review your policy. Now. Before you need it.