SEC Investigation Is a Claim First Made When Formal Order of Investigation Issues

The United States Court of Appeals for the First Circuit, applying Massachusetts law, has held that an SEC investigation of the insured company constituted a claim “first made” when the SEC’s formal order of investigation issued.  Jalbert v. Zurich Servs. Corp., No. 18-2244, 2020 WL 1322787 (1st Cir. March 20, 2020).  As a result, two excess insurers whose policies incepted after the formal order entered did not owe coverage.  Wiley represented one of the prevailing carriers.

The insured investment adviser purchased $10 million in D&O coverage for the October 3, 2012 to October 3, 2013 period.  It added two layers of excess coverage for the following October 3, 2013 to October 3, 2014 period. On September 23, 2013, the SEC entered a formal order of investigation against the investment adviser.  On October 2, 2013, the SEC issued a subpoena to the insured pursuant to the formal order of investigation.  The insurers on the 12-13 policy year paid their limits in defense costs, but the excess insurers who first issued policies for the 13-14 policy period denied coverage.  After the trustee for the bankrupt insured sued, the district court granted summary judgment for the insurers, holding that the SEC investigation claim was “first made” during the 12-13 policy period.

On appeal, the First Circuit affirmed.  The policies defined a “claim” to include “a formal regulatory proceeding (civil, criminal or administrative) against or formal investigation of an Insured.”  The policies also expressly provided that, “with respect to a formal investigation,” a claim is “deemed first made” upon “an Insured being identified by name in an order of investigation, subpoena, Wells Notice or target letter . . . as someone against whom a civil, criminal, administrative, or regulatory proceeding may be brought.”  The court concluded that the formal order of investigation easily established that a proceeding “may be brought” against the investment adviser.  The court held that the language required only the possibility that a proceeding could be brought against the insured, and no reasonable jury could find that the formal order did not connote that possibility.  The court rejected the insured’s argument that the policy language was ambiguous.  The court also distinguished various other cases addressing whether regulatory subpoenas constitute “claims,” highlighting the distinctive “claim” and “claim first made” requirements in the policies at issue.