(Article from Insurance Law Alert, June 2019)
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The First Circuit ruled that a D&O insurer had no duty to defend a Securities and Exchange Commission (“SEC”) Enforcement Action and related subpoenas because the investigation was a single “claim” that was first made prior to the policy’s inception. BioChemics, Inc. v. AXIS Reins. Co., 924 F.3d 633 (1st Cir. 2019).
In May 2011, the SEC commenced an investigation by Formal Order targeting BioChemics and its officers, which included the issuance of subpoenas. At that time, the company was insured by Greenwich Insurance Company. Beginning November 2011, BioChemics became insured by AXIS Reinsurance. Shortly thereafter, the SEC served additional subpoenas under the same SEC matter number and caption as the initial Formal Order. In December 2012, the SEC filed an Enforcement Action against the company and several individuals. AXIS denied coverage, arguing that because the entire SEC investigation constituted a single “claim” first made in May 2011, it was outside the scope of policy coverage. A Massachusetts federal district court agreed, ruling that AXIS had no duty to defend. (See January 2015 Alert). The First Circuit affirmed.
The AXIS policy provides that all 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 . . . .” Based on this policy language, the First Circuit concluded that all SEC actions against BioChemics and its officers over the two-year period were part of a single “claim.” Additionally, the First Circuit held that the claim was “first made” in May 2011 (during the Greenwich policy period) and was not subject to coverage under the AXIS policy. Notably, the court deemed it irrelevant that some of the misrepresentations alleged in the SEC enforcement complaint took place during the AXIS policy period.
The First Circuit expressly rejected the assertion that the 2011 SEC Order, each individual subpoena issued thereafter, and the 2012 SEC action were each a separate “claim” under the policy rather than components of a single claim that encompassed the entire SEC investigation. Likewise, the court dismissed BioChemics’ contention that policy language was ambiguous or that the Interrelated Wrongful Acts provision applied only to limits of liability, not to availability of coverage.