No Coverage for SEC Investigation Where Initial Investigative Order First Issued Before the Policy Period

The United States District Court for the District of Massachusetts has held that, where subpoenas served during a policy period refer to an investigative order first issued before the policy period and investigate the same officers and company for the same pattern of alleged securities law violations, the subpoenas were part of a single “claim” made before the policy period.  Biochemics, Inc. v. AXIS Reins. Co., Case No. 1:13-cv-10691-RWZ (D. Mass. Jan. 6, 2015).

The Securities and Exchange Commission (SEC) commenced a non-public investigation against a pharmaceutical company and its officers through a formal order on May 5, 2011.  The SEC served subpoenas on the company on May 9 and September 12, 2011, requesting documents and retaining the same caption as the formal order.  The company’s D&O liability insurance policy at issue afforded specified coverage for claims first made between November 13, 2011 and November 13, 2012.  In January and March 2012, the SEC served deposition and document subpoenas on the insured’s chief executive under the same SEC matter identification and number as the 2011 subpoenas.  After the insured provided its D&O carrier notice of the January and March 2012 subpoenas, the carrier denied coverage on the grounds that the SEC’s investigation was a single claim first made in May 2011, before the carrier’s policy incepted.

The policy defined a “Claim,” in pertinent part, as any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by … the filing of a notice of charge, investigative order, or like document.”  The policy also provided that “[a]ll Claims … arising from the same Wrongful Act … and all Interrelated Wrongful Acts shall be deemed one Claim and such Claim shall be deemed to be first made on the earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy ….”

In the coverage litigation that followed, the court held that there was no coverage for the SEC investigation because the May 5, 2011 formal order qualified as a “claim” and—because each subpoena served during the policy period was “issued under, and referred to, the original [f]ormal [o]rder, and investigated the same officers and company for the same pattern of security violations”—the subpoenas all constituted a single “claim” under the policy.