SEC’s Formal Order of Investigation Constitutes “Claim” First Made Before Policy Period

The U.S. District Court for the District of Massachusetts has held that two liability insurers did not owe coverage for the insured’s SEC investigation defense costs because the SEC investigation was a “claim” first made before the policy period.  Jalbert v. The Zurich Servs. Corp., 2018 WL 4232905 (D. Mass. Sept. 5, 2018).  Wiley Rein represented one of the prevailing carriers.

The insured investment adviser had $10 million in D&O coverage for the October 3, 2012 to October 3, 2013 period.  It added two layers of excess coverage for the following October 3, 2013 to October 3, 2014 period. On September 23, 2013, the SEC entered a formal order of investigation against the investment adviser.  On October 2, 2013, the SEC issued a subpoena to the insured pursuant to the formal order of investigation.  The insured notified its insurers of the SEC investigation and requested coverage under the 12-13 policy “or its renewal, which has not yet been received.”  The insurers on the 12-13 policy year paid their limits in defense costs.  The trustee for the insured then sought coverage under the two 13-14 excess policies for the remaining investigation costs.  The 13-14 excess insurers denied coverage because the SEC investigation was a not claim first made during the 13-14 period.

In the resulting coverage litigation, the court agreed with the excess insurers.  The court noted that the policies defined a “claim” to include “a formal regulatory proceeding (civil, criminal or administrative) against or formal investigation of an Insured.”  The policies also expressly provided that, “with respect to a formal investigation,” a claim is “deemed first made” upon “an Insured being identified by name in an order of investigation, subpoena, Wells Notice or target letter . . . as someone against whom a civil, criminal, administrative, or regulatory proceeding may be brought.”  The court concluded that the “plain policy language” showed that the September 23, 2013 formal order, which identified the insured by name, alleged several possible violations of federal securities laws, and directed the commencement of an investigation, was a claim first made during the 12-13 period.  The court rejected the trustee’s arguments to construe the unambiguous, “plainly expansive language” of the deemed-made clause in its favor.  According to the court, a “reasonable fact finder would be forced to conclude that the Order signified that a ‘civil, criminal, administrative, or regulatory proceeding’ might be brought against [the insured].”  Thus, because the “plain language of the contract makes clear that the [order of investigation] triggered the deemed-made clause,” the investigation of the insured fell outside of the 13-14 coverage period.