Delaware Court Finds No D&O Coverage for Internal Investigation and “Impending” FBI Investigation that Never Proceeded

The Delaware Superior Court, applying Delaware law, held that a former director and officer was not entitled to D&O coverage for legal fees incurred in connection with an internal investigation and a potential FBI investigation because neither constituted an “Interview” or “Investigation Demand” as defined in the policy. Hughs v. Royal Energy Resources, Inc., 2026 WL 2948434 (Del. Super. Ct. Sept. 28, 2026).

A former executive of the insured energy company reported alleged self-dealing and other misconduct by the company’s majority stockholder. In response, the company’s audit committee retained outside counsel and conducted an internal investigation, including interviewing the executive who reported the misconduct. Shortly thereafter, the executive learned that the FBI was contacting shareholders about their investment in the company. Although the FBI never contacted the executive, he retained personal counsel in anticipation of a potential interview.

The executive sought coverage under the company’s D&O policy for the fees he incurred in connection with the internal investigation and in anticipation of what he understood to be an impending FBI investigation. The company’s D&O policy afforded specified coverage for “Defense Expenses” incurred by insured persons “resulting from an Interview,” including legal fees incurred in connection with an “Investigation Demand” or “Interview.” An “Interview” included, in relevant part, a written request for a voluntary interview received by an insured person, while an “Investigation Demand” was defined to include an investigation conducted by the company to determine whether it should prosecute allegations made by a security holder in a derivative demand or action.

In the ensuing coverage litigation, the court ruled in favor of the insurer on cross-motions for judgment on the pleadings. As to the audit committee investigation, it found no allegation that the executive was a security holder of the company, as required by the policy’s definition of “Investigation Demand.” Nor did the court find coverage for the expenses related to the FBI investigation because the FBI never ultimately contacted the executive and, therefore, there was no “Interview.”