Why it matters

In a recent decision, the District Court of Massachusetts affirmed the importance of providing timely notice of all D&O liability claims – including subpoenas. An insured sought coverage from its D&O insurer under a claims-made and reported policy for defense costs it incurred as a result of an SEC enforcement action. The policy defined the term “Claim” broadly to include any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by . . . the filing of a notice of charge, investigative order, or like document.” Typically, insureds will give notice of any event that could be considered a “claim” in order to maximize defense costs paid by their insurer. As a practical matter, a target begins to incur defense costs when it is served with a subpoena, which further illustrates the need to initiate the process immediately. In this case, however, the insurer sought to establish that the subpoenas served prior to the inception of its D&O policy constituted claims in order to pursue a late notice defense. The court held that the insured had no coverage for the enforcement action because the claim related back to two subpoenas that the SEC served on the insured before the D&O policy incepted. The court reasoned that because the subpoenas indicated on their face that the SEC had commenced a formal investigation against the insured, each subpoena was a “Claim” that should have been reported to the insured’s prior D&O carrier. Siding with the insurer, the court found that because the events were a single claim, which started prior to the date the policy took effect, no duty to defend existed. This is a reminder for insureds to treat any governmental or similar notification as a claim if it reaches the specter of potential liability.

Detailed Discussion

BioChemics, Inc., a specialty pharmaceutical company focused on transdermal drug delivery systems, purchased D&O coverage from Axis Reinsurance Company (“Axis”). The policy incepted in November 2011 and insured covered claims that were made and reported during the policy period.

By a formal order, the SEC commenced an investigation of BioChemics and its officers on May 5, 2011. Throughout the year, the SEC served a series of document subpoenas on the insured pursuant to the investigative order. In December 2012, the agency filed an enforcement action against BioChemics and its officers. All of the documents from the SEC featured the caption “In the Matter of BioChemics, Inc. (B-02641).”

The SEC then served deposition subpoenas on the insureds, using the same caption, in early 2012.

BioChemics notified Axis of the 2012 subpoenas. Axis denied coverage, taking the position that the entire SEC investigation was a single “claim” that was first made in 2011 when the SEC issued its first document subpoena to BioChemics – before the Axis policy took effect.

In considering this issue, the court agreed that the subpoenas and the enforcement action were all part of the same investigation that formally commenced in May 2011. Therefore, the court concluded it was improper to consider the proceedings as separate claims for the purpose of triggering coverage under the Axis policy.

“The policy here defines a ‘Claim’ broadly to include, 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 court stated.

Central to the court’s analysis was that “[e]ach subpoena was issued under, and referred to, the original Formal Order, and investigated the same officers and company for the same pattern of security violations through public material misstatements.” Thus, the court agreed that there was only a single claim asserted against the policy’s insureds, and that because this claim was first made before the policy came into force, Axis’ denial of coverage was proper.

Because the Formal Order was issued on May 5, 2011, and the Axis policy did not take effect until November 13, 2011, the “investigation and enforcement action, the Claim at issue, was thus ‘first made’ before the policy period and is, therefore, not covered under the policy,” the court ruled, granting the insurer’s motion for summary judgment.

To read the decision in BioChemics, Inc. v. Axis Reinsurance Co., click here.