In an insurance coverage dispute arising out of the high-profile and long-running SEC investigation of and enforcement action against the investment firm Patriarch Partners and its CEO Lynn Tilton, a federal district court judge has ruled that coverage under Patriarch’s excess D&O insurance policy is precluded under the policy’s “Pending and Prior Claim” exclusion, because the investigation pending at the time the excess policy incepted represented a “Claim” under the relevant policy language. The court’s analysis includes an interesting discussion of the interaction between the SEC’s investigative actions and the applicable definition of the term “Claim.” The court’s analysis also involves a consideration of the implications for coverage purposes of the various stages within the SEC’s investigative processes. Southern District of New York Judge Valerie Caproni’s September 22, 2017 opinion can be found here.



Patriarch Partners is a private investment firm run by its founder and CEO, Lynn Tilton. Patriarch and Tilton are the target of a long-running SEC investigation that led to the SEC filing an Enforcement Complaint against them in 2015. In the enforcement action, the SEC asserts fraud charges against Tilton and Patriarch, accusing them of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage. The SEC alleges that Tilton and her firm collected almost $200 million in fees and other payments to which they were not entitled. The Enforcement Action remains pending.


Patriarch and Tilton are insured under a $25 million tower of D&O insurance. The top $5 million layer was added at the time of the renewal of Patriarch’s program in 2011. The $5 million layer is written on a “follow form” basis, meaning that its terms and conditions follow the terms and conditions of the primary D&O insurance policy in the Patriarch insurance program. However, the $5 million excess layer also included a Pending and Prior Claims Exclusion precluding coverage for any claims pending at the time $5 million layer was added to the program.


In the course of their defense of the SEC’s investigation and enforcement action, Patriarch and Tilton exhausted the first $20 million of the Patriarch D&O insurance program. Patriarch then sought to have the insurance under the top $5 million excess layer applied to their cost of defense. The excess insurer contended that because the SEC investigation was pending prior to the inception of the excess policy, coverage was precluded under the Pending and Prior Claims Exclusion. Patriarch filed a coverage lawsuit against the excess insurer. The parties filed cross-motions for summary judgment.


The History of the SEC Investigation

The history of the SEC’s investigation is critical to the question of whether or not the exclusion on which the excess insurer sought to rely is applicable. The investigation began in December 2009 when the SEC made an “informal” request to Patriarch for documents relating to certain investment instruments. The SEC followed up with additional document requests in June 2010 and September 2010. In May 2011, the SEC requested additional documents as part of what it called an “informal investigation.”


In May and June 2011, the SEC also sought documents from two former Patriarch executives, Todd Kaloudis and Meric Topbas. After discussions with the Topbas’s counsel, the SEC agreed to subpoena the documents it sought from Topbas. The Topbas subpoena was issued pursuant to an SEC formal order dated June 3, 2010, authorizing the investigation of Patriarch. The Formal Order of Investigation authorized the SEC to issue subpoenas, compel document production, and take evidence in connection with the investigation. The Formal Order also stated that the SEC has information that “tends to show” that “certain persons and entities involved in structuring and marketing” the investment instruments under investigation “may have been or may be … employing devices, schemes, or artifices to defraud” investors and clients, “in possible violation of the securities laws.”


Various additional meetings and discussions took place in July 2011, followed by the SEC’s request of information from Patriarch on August 11, 2011 (one day before the excess policy was bound). The SEC sent Patriarch a subpoena for documents on February 27, 2012. On March 5, 2012, Patriarch’s broker advised the insurers in the D&O insurance program, including the excess insurer, of the SEC’s investigation. The primary insurer and the other insurers in the program accepted the SEC’s February 27, 2012 subpoena as a Claim.


The Relevant Policy Language

The Pending and Prior Claims Exclusion to the excess policy provides that the policy does not apply to “any amounts incurred by the Insureds on account of any claim or other matter based upon, arising out of or attributable to any demand, suit or other proceeding pending or order, decree, judgment or adjudication entered against any Insured on or before July 31, 2011, or any fact, circumstance or situation underling or alleged therein.”


For reasons having to do with the insurance placement process that resulted in the addition of the $5 million excess layer to Patriarch’s insurance program, the parties disputed whether or not the exclusion as added to the excess policy reflected the parties’ intent when Patriarch agreed to purchase the additional excess policy.


For purposes of consideration of the parties’ cross-motions for summary judgment, Judge Caprioni accepted Patriarch’s argument that the parties’ agreement had been only to exclude from coverage any “Claim” as defined in the language of the primary policy that was pending or existed against Patriarch at the time the excess policy incepted on August 11, 2011. The critical question under the interpretation is when the SEC investigation became a “Claim” and whether it had become a claim on or before August 11, 2011.


The primary policy defined the term “Claim” to include “a written demand for monetary damages or non-monetary relief (including but not limited to injunctive relief or a written request to toll or waive the statute of limitations” or an “Investigation of an Insured alleging a Wrongful Act.”


The primary policy defined the term “Investigation” to include, among other things, “an order of investigation or other investigation by the Securities and Exchange Commission.”


The September 22, 2017 Opinion

In her September 22, 2017, Judge Caprioni granted the excess insurer’s summary judgment motion and denied Patriarch’s cross-motion. In granting the excess insurer’s motion, Judge Caprioni ruled that “analyzed separately or collectively, the Topbas Subpoena, the Formal Order of Investigation, and the SEC’s underling investigation of Patriarch constitute a ‘Claim’ against an Insured before August 11, 2011.”


Judge Caprioni held that the Topbas Subpoena satisfied the applicable definition of “Claim” because it represents a “demand” for “non-monetary relief” in the form of the requested documents. The subpoena itself “makes quite clear that compliance is not optional and that failure to produce the requested documents would trigger penalties.” Significantly, Judge Caprioni found that under the relevant policy language it was not necessary for a claim for “non-monetary relief” to include an allegation of a Wrongful Act in order to constitute a claim; she contrasted the absence in the “non-monetary relief provision of any reference to a Wrongful Act to the definition of Claim’s investigation provision, which restricted the term to investigation of an insured “alleging a Wrongful Act.”


In concluding that the Formal Order of Investigation involved a “Claim” within the meaning of the Policy, she noted that the definition of “Claim” explicitly references “an order of investigation or other investigation by the Securities and Exchange Commission.”


The Formal Order of Investigation also alleged a Wrongful Act because the order states that it has information that “tends to show” that Patriarch may be defrauding its clients in possible violation of the U.S. securities laws. This statement in the formal order of investigation “amounts to a declaration that the SEC is investigation an allegation of wrongdoing, albeit in the somewhat stilted language of the federal bureaucracy discussing an ongoing investigation.” Judge Caprioni rejected Patriarch’s argument that the Formal Order of Investigation did not “allege” a Wrongful Act because it did not constitute an accusation by the SEC that Patriarch had committed fraud.


Judge Caprioni noted that the “escalating seriousness “ of the SEC’s inquiry at the time of the Formal Order further supports her conclusion that the SEC was investigating an alleged ‘Wrongful Act.’ The Formal Order “marked a bright line in the SEC’s inquiry, which had moved from informal requests for information to a targeted investigation” using formal legal process including subpoenas.


Judge Caprioni concluded that because the SEC Investigation was a “Claim” that was pending prior to the inception of the excess in insurance policy, it is excluded from coverage under the excess policy.



Questions involving the interaction between the SEC investigative process and the D&O insurance policy provisions usually arise in a different context. The circumstance in which these issues usually come up is as part of the question of when coverage is triggered; the policyholder is usually arguing that coverage was triggered earlier in the investigative process while the insurer is arguing that coverage was triggered later. This case was reverse of the usual circumstance; here, the insurer was arguing that the policy definition of “Claim” was satisfied earlier in the process, while the policyholder was arguing that it was only satisfied later (and after the prior and pending claim date).


It is also important to note that there are important differences in the specific policy language in this dispute and policy language elsewhere. Many policies these days are very specific that the term “Claim” involves a formal SEC investigation or an SEC investigation pursuant to a formal order of investigation, a bright line standard not involved in this policy. Also, many policies these days also explicitly state that a subpoena is a claim. I emphasize these important differences between the policy language involved in this policy and the language now found in many other policies to underscore the fact that this case may or may not be helpful to other circumstances in which policyholders are arguing for coverage under the D&O insurance policy for SEC investigative proceedings.


Questions involving the application of D&O insurance policies in the event of the service of a subpoena arise frequently, as I noted in a recent post. But in the circumstance in which these questions arise, the question is usually whether or not the service of a subpoena is sufficient to trigger coverage. When a policyholder is arguing that coverage has been triggered, the policyholder must establish not only that a subpoena is a claim, but also that the subpoena involves an actual or alleged wrongful act. By contrast here, the insurer, in order to show that the pending and prior claim exclusion was triggered, had to show only that the Topbas subpoena was a “Claim” in order for coverage to be precluded; the insurer did not also have to show that a Wrongful Act had been alleged.  As Judge Caprioni pointed out, the provision in the definition of claim referring to a “demand for non-monetary relief” included no Wrongful Act requirement.


It is a frequent and arguably even common practice for excess insurers to add prior and pending litigation exclusions to their policy when a policyholder increases the limits of liability in their insurance program by adding a new layer of excess insurance. While the addition of a prior or pending claims exclusion is a common practice, it results in problems with a disconcerting frequency. Problems can arise, for example, when claims are pending that the policyholder didn’t know about (as discussed for example here). Questions often arise about how the prior and pending claim exclusion interact with other policy provisions (as discussed here).


Because the addition of a prior and pending exclusion to an added layer of excess insurance is a customary and generally accepted practice, the wording and impact of the exclusion may not always receive the attention it deserves. The fact that there was as much of a dispute as there was here about the wording of, as well as the meaning and intent of, the Pending and Prior Claims Exclusion is illustrative of the kinds of problems that can arise when these exclusions are added. (I want to emphasize that I am not suggesting that anyone did anything wrong here in connection with the placement of this policy; hindsight analysis of the placement, particularly without knowing all of the facts and circumstances surrounding the placement, is unwarranted.)


All of that said, given the level of investigative activity, it was always going to be an uphill battle for Patriarch to show that the SEC proceedings prior to the inception of the excess policy did not represent a Claim. As I noted at the outset, it is usually the policyholder that is arguing that an SEC investigation represents a Claim, in order to establish that coverage has been triggered. In that respect, Judge Caprioni’s analysis potentially could be helpful to other policyholders trying to show that an SEC investigation has reached the point where it represents a Claim, subject of course to any differences between the relevant policy language and the policy language at issue here.


Podcast: Understanding the Scope of D&O Coverage: I recently recorded a podcast with Michael Peregrine of the McDermott, Will & Emery law firm, as part of the law firm’s Governing Health podcast series focused on the concerns of corporate directors, particularly those in the Health Care industry. The podcast in which I recently participated is entitled “Understanding the Scope of D&O Coverage,” lasts just under 30 minutes, and can be found here.