massA recurring D&O insurance coverage issue involves the question of whether or not a subpoena constitutes a claim, as I have noted on prior posts (for example, here). When this issue comes up, the dispute is usually over whether or not there is coverage under the policy for the costs of responding to the subpoena and ensuing costs. But there are other implications if a subpoena is a claim, as was demonstrated in a January 6, 2015 decision (here) by District of Massachusetts Judge Rya Zobel.


Judge Zobel ruled that there was no coverage under Biochemics, Inc’s D&O insurance policy for defense costs incurred in an SEC investigation and enforcement action against the company and its CEO where the company had been served with an investigative subpoena before the policy commenced. Judge Zobel held that the claim was first made when the subpoena was served before the policy incepted and therefore was not covered under the policy..



On May 5, 2011, the SEC entered a formal order of investigation against BioChemics and its officers On May 9, and September 12, 2011, the SEC served Biochemics with document subpoenas. The subpoenas referenced the formal order of investigation. In January 12, 2012 the SEC served deposition subpoenas on the company’s CEO and two other individuals. In March 2012, the SEC served subpoenas for additional documents on the company and its CEO. The 2012 subpoenas referenced the May 2011 formal order. In December 2012, the SEC filed an SEC enforcement action against Biomedics, its CEO, and two stock promoters who had worked with BioChemics.


This coverage dispute involves the D&O insurance policy that Biochemics had in place during the period November 13, 2011 and November 13, 2012. Biochemics had D&O insurance in place before November 2011, but the insurance had been issued by a different insurance carrier. Biochemics notified the new D&O insurer of the January and March 2012 subpoenas. The insurer denied coverage, contending that the entire SEC investigation was a single “claim” that has commenced when the SEC issued its first document subpoena in May 2011, before the insurer’s policy went into effect.


Biochemics and its CEO initiated a lawsuit against the insurer seeking coverage under the D&O insurance for the defense costs incurred in the investigation and enforcement action. The parties cross-moved for summary judgment.


The claims made D&O insurance policy at issue provided that “Coverage under this Policy shall apply only with respect to Claims deemed to have been first made during the Policy Period and reported to the insurer in accordance with the terms herein.”


The policy defined “Claim” to mean, among other things, any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by … the filing of a notice of charge, investigative order or like document.”


The policy also specifies that all Claims “arising from the same Wrongful Act and all Interrelated Wrongful Acts shall be deemed to be first made on the earlier date that (1) and of the Claims is first made against an Insured under this Policy or any prior policy.”


The January 6 Decision 

In her January 6, 2015 order, Judge Zobel granted the insurer’s motion for summary judgment and denied the plaintiffs’ motion. In reaching this conclusion, Judge Zobel stated that:


The triggering events are all part of a single SEC Investigation under the Formal Order. Each 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 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.


Because, Judge Zobel said,  the investigation and enforcement action — that is, “the Claim at issue”  –was “’first made’ before the policy period”  it is, “therefore, not covered under the policy.”



It is interesting to me that this decision reaching the conclusion that the claim was first made when the first subpoenas were served in May 2011 omits the usual debate about whether or not a subpoena is a claim. That probably is because the company was looking for coverage for the defense fees incurred in connection with the January and March 2012 subpoenas, and so couldn’t really take the position that a subpoena is not a claim. Just the same, it is noteworthy that Judge Zobel seemed to accept that a subpoena is a claim, without the usual dispute over whether a subpoena is a “proceeding” or whether a subpoena can trigger coverage without an allegation of a Wrongful Act.


The more practical question here is why Biochemics sought coverage for the SEC investigation and enforcement action from the carrier that issued the November 2011-November 2012 policy, and not from the carrier whose policy was in force prior to November 2011. There is no way to tell from Judge Zobel’s opinion alone, but I am guessing that Biochemics did not give notice to the prior carrier of the May and September 2011 subpoenas, and only sought insurance coverage from any carrier once the January and March 2012 subpoenas were served. At some point, it must have occurred to Biochemics that it should have sought coverage from the prior carrier but perhaps by then it was too late. UPDATE: An alert reader points out that Footnote 1 to Judge Zobel’s opinion may shed some additional light on this issue. Footnote 1 says “Claims are also pending in this action against plaintiffs’ insurance brokerage firm and an individual broker; thay are not at issue at the current juncture.”


In any event, the important point here is that if a subpoena is a claim, then it is a claim for al purposes under the policy, including for purposes of determining the claims made date. The usual scenario is that an insured is seeking to establish that a subpoena is a claim in order to be able to establish coverage. Here, the fact that a subpoena is a claim and service of a subpoena establishes the claims made date wound up precluding coverage for this policyholder.