SECURITIES CORNER

A Delaware Court held that the Insured could not relitigate whether an SEC investigation constituted a Securities Claim against an Insured following an earlier holding by a New York court in a suit the Insured filed against its Insurers. The New York court held that the SEC investigation for which the Insured sought coverage was not a Securities Claim. Additionally, the Delaware court examined whether a generalized letter from the SEC to the Insured constituted a Claim against insured persons.

After the SEC launched its investigation by sending a generalized letter to the Insured’s company (which neither named nor targeted any directors), the Insured tendered the matter to its primary and first excess Insurers. The Insurers denied coverage, which prompted the Insured to sue them in a New York Federal court. The New York court held that the matter did not qualify as a Securities Claim and that the Insured failed to demonstrate a pursuit for covered claims. Subsequently, the Insured filed a lawsuit against the excess Insurer in Delaware. In the Delaware suit, the Insured, again, argued that the SEC investigation constituted a Securities Claim and that the matter constituted a Claim against Insured Persons for a Wrongful Act.

The Delaware court identified numerous issues and ruled predominantly against the Insured. First, the court explained that it was procedurally precluded from reviewing a question that was already decided by the New York court because an interpretation of an insurance contract was not a pure question of law. The court also required the application of contract rules to facts at issue and since the second excess Insurer demonstrated that a New York court covered the issue already, it could not be relitigated. Second, in addressing the generalized SEC letter, the Delaware court disagreed with the Insured’s argument that it amounted to a “claim against unnamed and unreferred-to individuals because it was that they were being investigated.” According to the court, because the Insured company, and not its employees were named in the SEC letter, and was addressed to the Insured company alone, the letter did not constitute a Claim against Insured Persons to trigger a line of coverage under the D&O policy. Therefore, the court held, no coverage was available under the D&O policies.