The First Circuit, applying Massachusetts law, has held that an SEC investigation was a single claim first made when an insured received the formal order of investigation.  The court rejected the insureds’ attempt to split the investigation into various different claims based on the SEC’s subsequent subpoenas and enforcement action.  Biochemics, Inc. v. Axis Reinsurance Co., 2019 WL 2223125 (1st Cir. May 23, 2019).

In May 2011, the SEC entered a formal order of investigation against the insured company and issued document subpoenas to the company.  In November 2011, the insureds purchased a new D&O policy.  In January 2012, the SEC issued additional subpoenas seeking testimony from the company’s CEO and other individuals.  In March 2012, the SEC issued additional document subpoenas to the company and its CEO.  In December 2012, the SEC instituted an enforcement action against the company and its CEO.  After the insureds tendered the March 2012 subpoenas under the D&O policy, the insurer denied coverage on the basis that the SEC investigation was not a claim first made during the policy period.  The insureds then commenced coverage litigation.

The First Circuit affirmed summary judgment for the insurer.  The court rejected the insureds’ argument that the component parts of the SEC investigation were each separate claims.  First, the court did not think that each SEC subpoena was a “written demand [for] non-monetary relief.”  The court held that subpoenas do not seek “relief” as defined by Black’s Law Dictionary (“redress or benefit, esp. equitable in nature (such as an injunction or specific performance) that a party asks of a court”).  The “claim” definition included investigations “commenced by” various documents, including subpoenas.  The court observed that it would be illogical to interpret the policy as treating a subpoena as an independent “written demand [for] non-monetary relief” rather than as a component part of the investigation.

Second, the court held that even if the component parts of the investigation were separate claims, under the policy’s Interrelated Wrongful Acts provision, they would be deemed to constitute a single claim first made at the time the formal order of investigation entered.  The court held that the Interrelated Wrongful Acts provision governed the time at which a claim would be deemed first made and did not apply solely to the limits of liability as the insureds contended based on its location in the policy.  The court also addressed and rejected the insureds’ argument that the Interrelated Wrongful Acts provision could not apply because the formal order of investigation and pre-policy period subpoenas did not allege “wrongful acts.”  The court held that the term “allege” was sufficiently broad to encompass the potential violations of law outlined in the formal order of investigation.  The court agreed that the subpoenas did not allege “wrongful acts” but noted that this fact did not help the insureds, who elsewhere argued that the subpoenas issued later, during the policy period, were standalone claims for wrongful acts triggering coverage.  Finally, the court reasoned that there was sufficient overlap between the conduct at issue in the pre-policy period formal order of investigation and the later subpoenas and enforcement action to constitute Interrelated Wrongful Acts.