California SPAC Entitled to Advancement of Subpoena-Related Costs Post-Name Change Based on “Potentially Covered” Standard

The United States District Court for the Northern District of California, applying California law, has held that two former directors and officers were entitled to advancement of defense costs incurred in connection with SEC subpoenas based on the “potentially covered” claim standard. AmTrust Int’l Underwriters DAC v. 180 Life Sciences Corp., 2024 WL 557724 (N.D. Cal. Feb. 12, 2024). The court also found that the D&O insurers failed to carry their burden to prove that a “Change in Control” exclusion applied to bar coverage.

The insured, a special purpose acquisition company (SPAC), underwent a merger resulting in a name change. The SEC investigated the merger and issued subpoenas to two former directors and officers of the SPAC. The post-merger entity sought coverage under its D&O policies for the defense costs advanced on behalf of the two former directors and officers.

The policies’ Advancement clause provided that “the Insurer shall advance Defense Costs . . . not less often than every 90 days and prior to final disposition of the Claim.” The Advancement clause provided further that “[s]uch advanced payments by the Insurer shall be repaid to the Insurer” in the event the “Insured shall not be entitled … to payment of such Loss.” The policies’ Change in Control Exclusion applied if the SEC subpoenas were construed to allege “in whole or in part” any “Wrongful Acts committed, attempted or allegedly committed or attempted by any Insured” after the merger date.

The primary D&O insurer filed a coverage action asserting that the post-merger entity was not an insured and that subpoena-related expenses were subject to policy exclusions. On the prior motion for partial summary judgment filed by the post-merger entity, the court ruled that the post-merger entity was the named insured under the policies issued to the SPAC and that the SEC subpoenas constituted potentially covered Claims under the policies. Thereafter, the post-merger entity filed another motion for partial summary judgment arguing that the insurers were required to advance defense costs incurred in connection with the subpoenas. 

The court granted the motion, holding that the insurers were required to advance the subpoena-related defense costs pending a final coverage determination based on the policies’ “Advancement” clause. The court held that the clause required advancement of “potentially covered” defense costs, rejecting the insurers’ argument that it applied only to “actually covered” costs. The court reasoned that the Advancement clause provided for the insurers’ ability to recoup defense costs if a claim is ultimately deemed not covered, and, thus, it followed that the clause required advancement of all potentially covered costs in the first instance. 

Further, the court rejected the insurers’ argument that coverage for the SEC subpoenas was barred by the policies’ Change in Control Exclusion, holding that the insurers failed to carry their burden to show that the subpoenas alleged in whole or in part any Wrongful Acts committed or attempted after the merger date.  The court acknowledged that it was possible that the SEC’s investigation was limited to acts occurring in the pre-merger period, but opined that it was also possible that the investigation encompassed post-merger conduct.  The court concluded that, because the subpoenas did not contain specific allegations, there was no evidence from which it could conclusively determine the scope of the investigation.  The court thus ordered the insurers to advance defense costs subject to recoupment in the event they could later establish that the SEC investigation included post-merger wrongdoing.


Wiley Executive Summary

Sign up for updates

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.