The United States District Court for the Northern District of California recently held that a securities fraud claim related back to a notice of circumstances given by the insured to its primary and excess D&O insurers concerning an earlier patent infringement case. Magma v. Genesis, et al., No. 5:06-CV-05526-JEW (Jul. 24, 2008).

In 2004, the insured was sued for patent infringement and sent the complaint along with a cover letter to its primary and excess D&O insurer. The primary insurer denied coverage because no insured person was named as a defendant in the complaint. Despite the denial, the insured requested that the insurers consider the patent infringement action complaint and the accompanying letter as a notice of circumstances that could give rise to a claim under the D&O policy. The insured’s broker also informed a claims representative from the primary insurer that, in the past, a patent suit formed the basis for a D&O liability claim against the same insured. The primary and excess insurers subsequently accepted the patent infringement action materials as a “notice of circumstances” pursuant to the D&O policy.

In 2005, two securities law suits were filed against Magma that cited Magma’s alleged failure to disclose the 2004 patent infringement case. The primary insurer denied coverage on the securities actions. The excess insurer on risk in 2004 then filed a declaratory judgment action, and the insured impleaded the primary insurer (on risk throughout the time period) and the excess insurer on risk in 2005.

On summary judgment, the court considered the question of whether the securities action was related to and/or arose from the patent infringement action so as to implicate the earlier excess policy. Noting that the basis for the securities action was the insured’s alleged failure to disclose to its shareholders that it faced a serious risk of infringing on the intellectual property rights of a competitor, and that such circumstances were the same as those that the insured had previously noticed in regard to the patent infringement action, the court concluded that the securities claim arose from the patent infringement action. Therefore, the court found that the securities claim related back to the notice of circumstances provided under the 2004 policy.

To read the full opinion, please click here.