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United States District Court Holds SEC Non-public Formal Investigation is a “Claim” Under a D&O Insurance Policy

Blogs, Insurance Coverage

In its January 6, 2015 decision in Biochemics, Inc. v. Axis Reinsurance Co., 1:13-cv-10691-RWZ (D. Mass. 2015), the United States District Court for the District of Massachusetts ruled that a non-public formal investigation by the SEC constituted a “claim” under a D&O insurance policy.  In that case, AXIS issued a D&O policy, on a claims-made and reported basis, for the term running from November 13, 2011, to November 13, 2012.  Prior to the policy’s inception date, in May 2011, the SEC issued subpoenas to various Biochemics officers and directors as part of a non-public formal investigation.  Biochemics did not report the investigation to its prior D&O insurer.

In December 2011, the SEC commenced a formal enforcement action against Biochemics, its directors and officers, and various other individuals.  Biochemics made a claim under the AXIS policy, which AXIS denied coverage for on the basis that the SEC’s non-pubic formal investigation and the enforcement action comprised a single claim first made prior to the inception of the AXIS policy.  The court agreed and ruled that it was improper to consider the investigation and the enforcement action separate claims for the purpose of triggering coverage under the AXIS policy.  In reaching its decision, the court noted that each of the subpoenas was issued under the same SEC formal order and investigated the same officers for the same purported wrongful conduct.  The court ultimately ruled the denial of coverage was proper because there was only a single claim asserted against the insureds and that claim was first made before the AXIS policy came into effect.