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Massachusetts Federal Court Holds Claim Precluded Under D&O Policy Because It Was “First Made” Before the Policy Period

Blogs, Insurance Coverage

On January 6, 2015, the United States District Court for the District of Massachusetts held that an insured’s claim for defense costs associated with a Securities Exchange Commission (“SEC”) investigation was properly denied because the claim was first made prior to the inception of the applicable insurance policy. BioChemics, Inc. and John Masiz, v. Axis Reinsurance Company, et al., No. 13-10691-RWZ, (D. Mass. Jan. 6, 2015).

The SEC commenced a formal investigation against BioChemics, Inc. (“BioChemics”) and its officers, including its CEO, John Masiz, pursuant to a formal order dated May 5, 2011. On May 9 and September 12, 2011, the SEC served document subpoenas on BioChemics. In January and March 2012, the SEC served deposition subpoenas on Masiz and two other individuals, as well as additional document subpoenas on BioChemics. Thereafter, in December 2012, the SEC filed an enforcement action against BioChemics alleging that it and Masiz had engaged in a fraudulent scheme to sell BioChemics securities by misleading investors about the company’s value.

Prior to November 2011, BioChemics was insured under a D&O policy issued by Greenwich Insurance Company (“Greenwich”). BioChemics did not report the SEC investigation to Greenwich. After the expiration of the Greenwich policy, BioChemics purchased a policy from the defendant, Axis Reinsurance Company (“Axis”). Both policies were issued on claims made basis. 

The Axis policy covered claims made between November 13, 2011, and November 13, 2012, and provided: “[a]ll claims, including all D&O 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 . . . any of the Claims is first made against an Insured under this Policy or any prior policy . . . .” Further, the policy stated: “[c]overage under this Policy shall apply only with respect to Claims deemed to have been first made during the Policy Period and reported in writing to the Insurer in accordance with the terms herein.” Moreover, the Policy defined a “Claim” broadly to include, inter alia, any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by . . . the filing of a notice of the charge, investigative order, or like a document.”

When BioChemics notified Axis of the January and March subpoenas, and the enforcement action, Axis denied coverage on grounds that the entire SEC investigation and enforcement action was a single “claim” that was first made in May 2011 when the SEC issued its first document subpoena to BioChemics – before the Axis policy took effect. Thereafter, BioChemics and John Masiz filed suit to recover the costs associated with defending the SEC investigation and enforcement action. 

The district court granted summary judgment in favor of Axis, holding that the triggering events were all part of a single SEC investigation under the formal order. Each subpoena was issued under the original formal order and investigated the same officers and company for the same pattern of security violations. Thus, under the clear language of the policy, the court found that the subpoenas all constituted a single “Claim” under the policy. Given that the formal order issued on May 5, 2011, and the policy went into effect on November 13, 2011, the court went on to hold that the claim at issue – the investigation and enforcement action – was “first made” before the policy period and was, therefore, not covered under the Policy.