SEC Investigation of Company Not a “Claim” or “Securities Claim”

Applying New York law, the United States District Court for the Southern District of New York has held that an SEC investigation of the insured company did not constitute a “Securities Claim,” where the term expressly excluded investigations.  Hertz Global Holdings, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 2021 WL 1198802 (S.D.N.Y. Mar. 30, 2021).  The court likewise held that the investigation did not constitute a “Claim” against Insured Persons, notwithstanding cooperation of former executives in the investigation.

In 2013, a securities class action was filed against the insured car rental company.  The next year, the company received an SEC Formal Order of Investigation providing that the SEC had “information that tends to show” securities law violations.  The company noticed the class action and investigation under a policy that afforded coverage for “Securities Claims” against the company and “Claims” against Insured Persons.  The policy defined “Securities Claim” as “a Claim, other than an investigation of an Organization . . . alleging” securities law violations.  The insurer accepted the class action as a “Securities Claim” and denied coverage for the investigation.  The company filed suit alleging breach of contract.

In the coverage litigation, the court rejected arguments that the company was entitled to defense costs for the investigation and dismissed the case with prejudice.  The court held that the investigation was not a “Securities Claim” because the term unambiguously excluded coverage for investigations into the company and rejected the company’s various arguments for coverage.

First, the company argued that the investigation was a “Securities Claim” because the term includes “an administrative or regulatory proceeding against an Organization.”  The court reasoned that because the SEC had not brought a formal accusation against the company and the policy otherwise distinguished investigations from administrative or regulatory proceedings, the investigation did not constitute an administrative or regulatory proceeding.

Second, the company argued that the investigation was a “Securities Claim” because it was a “Claim” alleging a violation of securities law.  The court disagreed because the policy excluded coverage for investigations of the company, including those that allege a violation of securities law.

Third, the company argued that the investigation was a “Claim” because “Claim” includes “a written request to toll or waive a period or statute of limitations” and an “administrative or regulatory investigation.”  The court rejected this argument because the policy limited coverage for “Claims” to Insured Persons.

Fourth, the company argued that its defense costs for the investigation were related to the class action accepted as a “Securities Claim.”  The court observed that the company may only recover losses “arising from a Securities Claim” and that defense costs were those “resulting solely from . . . defense and/or appeal of a Claim,” and determined that there was no evidence that the investigation costs arose or resulted solely from the class action such that coverage applied.

Finally, the insured argued that the investigation was a “Claim” against an Insured Person because the investigation targeted employees and resulted in former executives signing tolling agreements with the SEC.  The court explained that the Insured Persons’ cooperation in the investigation into the company did not transform the investigation into a “Claim” against those Insured Persons.  The court further noted that the company failed to allege sufficient detail about the tolling agreements to demonstrate they constituted Claims against Insured Persons.

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