By | January 8, 2015

This post was written by Courtney C.T. Horrigan.

The District Court of Massachusetts’ January 6, 2015 opinion in Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493 (D. Mass. Jan. 6, 2015), reaffirms the importance of providing timely notice of all D&O liability claims – including subpoenas. In Biochemics, the policyholder sought coverage from its primary D&O liability insurer, Axis, for defense costs it incurred in an SEC enforcement action commenced during the AXIS policy period. Judge Rya Zobel held that Biochemics had no coverage for the SEC enforcement action because it related back to two deposition subpoenas that the SEC served on Biochemics before the AXIS policy incepted. Because those deposition subpoenas indicated on their face that the SEC had commenced a formal investigation against Biochemics, each subpoena was a “Claim” that should have been reported to Biochemics’ prior D&O carrier. Because the Claim was “first made” before the AXIS policy period, Judge Zobel granted AXIS’ motion for summary judgment and found that AXIS owed Biochemics no coverage under its policy.

Judge Zobel noted that the AXIS 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.” Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493, at *3. Biochemics did not dispute that it had been served with two SEC deposition subpoenas during the prior policy period that were captioned “In the Matter of Biochemics, Inc. (B-02641)” and sought documents regarding Biochemics operations from 2007 forward. Judge Zobel found that the caption and contents of the SEC subpoenas put Biochemics on notice that it was being investigated by the SEC for alleged misconduct. Although the subsequent enforcement action alleged misconduct from 2009 until mid-2012, and relied in part on purported misconduct that occurred after the first document subpoena was issued, Judge Zobel did not analyze the overlap between the deposition subpoenas and the allegations in the enforcement action and instead simply found 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. Under the clear language of the policy and on the record before the court, the subpoenas all constituted a single “Claim” under the policy.”

Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493, at *3.

Because the policy language unambiguously stated that a 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….” Judge Zobel held that the SEC enforcement action was “first made” when the first deposition subpoena was served on Biochemics. Accordingly, the SEC enforcement action did not arise during the AXIS policy period.

Biochemics makes clear that policyholders should always give notice of any event that could be considered a “Claim” under a D&O policy. There was no allegation that AXIS was prejudiced by any late notice, but that fact was irrelevant to Judge Zobel’s decision under Massachusetts law. Policyholders should negotiate notice provisions that require the policyholder to give notice only when specified persons within the company – such as the Insurance Risk Manager and General Counsel – become aware of the event that constitutes a Claim. And when a Claim comes in, notice to the insurance company should quickly follow.

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