Hertz Global Holdings, Inc. v. National Union Fire Company of Pittsburgh

Background

Hertz Global Holdings, Inc. purchased a $15 million insurance policy from National Union Fire Insurance Company of Pittsburgh on November 16, 2013, and a separate $15 million follow-form policy from U.S. Specialty Insurance Company. The policies covered certain securities claims against Hertz and claims against insured persons, generally including officers and people indemnified by Hertz.

A private securities class action was filed against Hertz in November 2013. In July 2014, Hertz notified the insurers that the Securities and Exchange Commission was demanding documents concerning Hertz’s financial statements for earlier years. National Union informed Hertz that the private securities action qualified as a covered securities claim but that the Securities and Exchange Commission investigation did not. U.S. Specialty later adopted that position.

The Securities and Exchange Commission issued a formal order in September 2014 directing a private investigation and authorizing subpoenas. Hertz alleged that it spent $27 million in fees and costs related to the investigation, including costs involving current and former employees. Hertz later paid a $16 million settlement penalty to the Securities and Exchange Commission, but it abandoned its claims concerning that penalty in the Second Amended Complaint. The remaining claims sought reimbursement for investigation-related costs under the insurance policies.

Choice of Law

The parties did not directly address which state’s law governed the dispute. The court declined to decide whether New York, Florida, or Delaware law applied because the relevant contract principles were aligned. It resolved the motion under New York law, including because the parties relied on that law for some issues in their briefing.

Claims for Breach of Contract

The court treated the Second Amended Complaint as asserting one cause of action: breach of contract. Under the applicable standard for a motion to dismiss for failure to state a claim, Hertz had to allege enough facts to make a legally plausible claim. The court could dismiss the claim if the policy’s plain language contradicted or failed to support Hertz’s allegations.

Coverage for Hertz as the Organization

The policy covered losses arising from a “Securities Claim” against Hertz. The policy defined “Securities Claim” as a claim alleging a securities-law violation, but expressly excluded “an investigation of an Organization.” The court held that this language unambiguously excluded the Securities and Exchange Commission’s investigation of Hertz.

The court rejected Hertz’s argument that the formal order began an administrative or regulatory proceeding rather than an investigation. The order stated that the Securities and Exchange Commission had information suggesting possible violations and authorized an investigation to determine whether violations had occurred. It did not accuse Hertz of wrongdoing or seek a penalty, injunction, or other remedy. The policy also separately listed administrative or regulatory proceedings and investigations involving insured persons, reinforcing the distinction between the two types of matters.

The court also rejected Hertz’s argument that the formal order was a covered claim alleging securities-law violations. The order indicated only that the Securities and Exchange Commission had information suggesting possible violations, and, in any event, the policy expressly excluded investigations whether or not they included allegations of wrongdoing.

The court further held that Hertz could not treat the investigation costs as losses arising from the separate private securities action. The policy covered defense costs only when they arose from and resulted solely from the defense of a covered claim. Hertz did not allege that the private action caused the Securities and Exchange Commission investigation or that the investigation would not have occurred without the private action.

Claims Against Insured Persons

The policy used different language for claims against insured persons and included certain administrative or regulatory investigations and written requests to toll or waive a limitations period. Hertz alleged that the Securities and Exchange Commission targeted individuals connected with Hertz, that three former senior executives signed tolling agreements, and that the investigation continued against one former senior executive.

The court held that these allegations were insufficient. General allegations that individuals cooperated with the investigation or could receive subpoenas did not show that the Securities and Exchange Commission was investigating those individuals or had made claims against them. Hertz provided too few details about the tolling agreements to establish that they were covered claims against insured persons. The court also held that Hertz had not alleged that it submitted a reimbursement claim for any insured person or that the insurers denied such a claim, so it had not adequately alleged a breach.

Declaratory Relief and Disposition

Although Hertz removed its separate declaratory-judgment claim from the Second Amended Complaint, it still requested a declaration that it was entitled to future reimbursement of investigation-related legal fees and costs. Because Hertz failed to state a claim, the court held that it was not entitled to that remedy.

Judge Alison J. Nathan granted the defendants’ motion to dismiss. The court dismissed Hertz’s Second Amended Complaint with prejudice because Hertz had already amended twice and further amendment would be futile, particularly in light of the policy’s unambiguous language. The Clerk was directed to enter judgment and close the case.