A recent Summary Order issued by the Second Circuit, which highlights the exposure that insureds face in connection with a United States Securities and Exchange Commission (SEC) investigation and why these claims will continue to proliferate into the foreseeable future. However, what is arguably the most important aspect of the case concerns the policy’s underwriting. The case, Patriarch Partners, LLC v. Axis Insurance Company, arose out of what appeared on the surface to be a relatively straightforward question, i.e., whether an excess carrier, Axis, was required to assume the obligation to cover Patriarch’s $25 million in defense costs it incurred to defend an administrative enforcement action filed against it by the SEC.
The Second Circuit’s ruling, while not binding, highlights the importance of an often overlooked underwriting tool – Warranty Statements. In this case, the Second Circuit bypassed the District Court’s holding which precluded coverage under the policy’s “prior or pending claims” endorsement, relying instead exclusively on a warranty statement signed by the insured’s only officer. The Warranty Statement came about during the underwriting process and a concern that Axis would issue a policy “and be immediately hit with a claim that the client knew was close but hadn’t been filed yet.” By executing the Warranty Statement, Patriarch affirmed that it was not aware of any facts or circumstances that would reasonably be expected to result in a Claim. The Warranty also specifically excluded coverage for Claims relating to facts or circumstances of which the insured was previously aware and would reasonably have expected to result in a Claim. The Second Circuit concluded that the insured was in fact aware of an SEC informal inquiry as well as an SEC Order of Investigation prior to the effective date of the Warranty –which constituted “facts and circumstances” that could reasonably be expected to give rise to a Claim under the Axis policy.
One often litigated issue when dealing with governmental and/or administrative investigations, concerns what constitutes a “claim.” While this will undoubtedly remain true into the foreseeable future, insurers would be well-suited to pay homage to this Second Circuit decision and the need for strong and thorough underwriting. Here, Axis’s use of a simple but carefully worded Warranty Statement made all the difference. Warranty statements, while traditionally used in connection with Directors and Officers Liability policies, Fiduciary Liability policies, and Employment Practices Liability policies do not need to be limited to those. These can be just as effective when considering malpractice insurance sought by doctors, accountants or lawyers, or even homeowners in connection with the age or condition of different portions of their property.
At Rebar Bernstiel, our professional liability attorneys and coverage counsel will continue to follow this and other related issues that impact professional liability policies, such as Directors and Officers Liability policies, Fiduciary Liability policies, and Employment Practices Liability policies.
C. Scott Rybny