United States District Court, E.D. Virginia, Alexandria Division
LIAM O'GRADY, District Judge.
Before the Court are two cross-motions for summary judgment: Defendant Starr Indemnity & Liability's Motion for Summary Judgment on its counterclaim against Protection Strategies (Dkt. No. 50) and Plaintiff Protection Strategies' Motion for Partial Summary Judgment on the Duty to Defend (Dkt. No. 53). Four other motions filed in this case (Nos. 72, 77, 78, 80) are now moot as a result of the voluntary dismissal of third-party defendants Hedman, Sanborn, Richards, and Lux. The parties have opposed each other's motions for summary judgment (Dkt. Nos. 60, 61), and both parties have replied in support of their respective motions (Dkt. Nos. 71, 73). The Court has reviewed the pleadings in this case and heard oral argument on March 14, 2014, and for the reasons stated in open court and those set forth herein, the Court issues this opinion granting the Defendant's motion and denying the Plaintiff's motion.
Plaintiff Protection Strategies, Incorporated ("PSI") is a global security management and consulting company. In February 2011, PSI purchased a one-year "Resolute Portfolio for Private Companies" insurance policy from Defendant Starr Indemnity & Liability Company ("Starr") to protect itself and its officers from various liabilities and claims, and the cost of litigating and defending those claims ("the 2011 Policy"). The 2011 policy covered all Claims made between February 6, 2011 and February 6, 2012. PSI purchased a renewal of that policy (with several alterations) in February 2012, which provided PSI coverage for Claims made between February 6, 2012 and February 6, 2013 ("the 2012 Policy").
The Directors & Officers Liability ("D & O") Coverage section of the policies provided PSI with coverage for three major categories of losses: (1) Losses incurred by an "Insured Person" (i.e. an executive or employee of the company) in response to a Claim against that person, (2) Losses incurred by the "Insured" (i.e. PSI itself) to indemnify Insured Persons against Claims, and (3) Losses incurred by the Insured arising from Claims against the Insured itself. In this case, PSI's defense costs implicate categories (2) and (3), because PSI has sought coverage for indemnification of its Officers as well as defense costs for its own defense.
On January 30 and 31, 2012, PSI received a subpoena from the NASA Office of the Inspector General ("NASA OIG") and a search and seizure warrant issued by the United States District Court for the Eastern District of Virginia (Dkt. Nos. 51-4, 51-5). The warrant specifically stated that the government was seeking evidence of "violations of 18 U.S.C. §§ 287 (false claims), 371 (conspiracy), 1001 (false statements), 1031 (major government fraud), 1341 (mail fraud), 1343 (wire fraud), and 1349 (conspiracy), as well as 15 U.S.C. § 645 (false statements to the Small Business Administration)." On February 1, 2012, NASA OIG executed a search of PSI's headquarters in Arlington, Virginia, seizing hundreds of boxes of records, hard drives, and other files. In addition to the company itself, several of PSI's current and former officers were informed that they were also individually targets of the NASA OIG investigation. On February 10, 2012, PSI sent notice of the NASA OIG investigation directly to Starr's underwriter. Starr's underwriter acknowledged receipt, but directed PSI to send notice of its claim to LVL Claims Services ("LVL"), Starr's claims handler, per the instructions in the policy. Two weeks later, PSI forwarded notice of its claim to LVL. Starr sent PSI a reservation of rights letter and began reimbursing PSI for the defense costs PSI incurred indemnifying its officers.
On June 14, 2012, PSI received a letter from the United States Attorney for the Eastern District of Virginia indicating that, along with the Department of Justice, it was investigating PSI for purposes of civil liability in connection with PSI's participation in the Small Business Administration Section 8(a) program. PSI informed Starr of this development.
The individual PSI officers being investigated, which both parties agree are "Insured Persons" under the policy, have each been represented by separate counsel throughout the investigation. PSI retained the law firm Dickstein Shapiro to represent the company itself and to coordinate its overall response to the investigations. Starr initially took the position that the investigation did not constitute a "Claim" with respect to PSI itself, because it did not meet the definition of Claim in Paragraph 2 of the D & O Liability Coverage Section. However, this Court's September 10 Order (Dkt. No. 29) confirmed that the search warrant and subpoena did create a "Claim" against PSI even in the absence of formal criminal prosecution, and Starr has since complied by reimbursing PSI for its defense costs. As of the date of Starr's counterclaim, Starr had advanced over $670, 000 to PSI for defense costs incurred by PSI itself, and by its Officers Hedman, Lux, Richards, and Sanborn.
The investigation of PSI and its Officers continued through 2012 and in 2013, four of PSI's Officers entered plea agreements in the Eastern District of Virginia to crimes including major fraud against the United States, conspiracy to commit fraud, and bribery in connection with PSI's violations of the SBA Section 8(a) program. PSI's former CEO Keith Hedman entered a plea agreement in March 2013 to a two-count criminal information of major fraud against the United States and conspiracy to commit bribery in violation of 18 U.S.C. §§ 1031 & 371, which became final at his sentencing on June 25, 2013. His plea stated that along with others at PSI, Hedman created a shell company ("Company B") to obtain Section 8(a) certification and win contracts that PSI would not otherwise have qualified for. Hedman admitted that Company B received over $31 million in U.S. government contracts as a result of the scheme, with over $5 million of those funds flowing to PSI. Each PSI Officer's guilty plea stipulated that the Officer knowingly and willfully took actions in furtherance of this fraud from approximately 2003 until the investigation began in 2012.
Although the parties debate when Starr became aware of the guilty pleas, on September 27, 2013 Starr filed a motion for leave to amend and to file a supplemental response to PSI's complaint (Dkt. No. 31). The motion was opposed by PSI but was granted by Judge Davis on November 1, 2013. On November 4, 2013 Starr filed its amended answer and complaint/third-party complaint, seeking a declaratory judgment against PSI and its four Officers and recoupment of all defense costs on the basis that the guilty pleas rendered the entire investigation excluded from the insurance policy. The third-party defendants all having been dismissed, Starr now seeks summary judgment against PSI on each count of its counterclaim. PSI has moved for partial summary judgment on Starr's duty to defend.
In its September 10, 2013 Order, this Court held that the NASA OIG search warrant and subpoena directed at PSI constituted a "Claim" as that term is defined in Section 2(a) of PSI's Directors & Officers Liability insurance policy. Therefore, to the extent that the Claim was not otherwise excluded from the insurance policy, the Court found that Starr had a duty to defend not only PSI's individual directors, but also PSI itself. Starr has since amended its answer to add a counterclaim against PSI seeking, primarily, recoupment of all funds it advanced to PSI for its defense in the NASA OIG Investigation. The Court now considers whether, in the wake of the PSI officers' guilty pleas, the entire investigation falls within the policy's exclusions. After considering the pleadings and the exhibits in this case, the parties' arguments before the Court, and applicable Fourth Circuit law, the Court finds that the policy's ...