No Coverage for SEC Investigation of Insured Company

The Superior Court of Delaware has held that collateral estoppel bars an insured company from relitigating whether, under a second excess follow-form D&O policy, an SEC letter and order (collectively the “SEC Matter”) constitute a Securities Claim against an insured company because another court already held they did not when interpreting the primary D&O policy. Hertz Global Holdings, Inc. v. Alterra Am. Ins. Co., 2023 WL 8716803 (Del. Super. Ct. Dec. 18, 2023). The court further held that the SEC Matter did not constitute a Claim against “Insured Persons,” and, even if the defense of the SEC Matter was reasonable and necessary for two covered lawsuits, the defense costs the company incurred in connection with the SEC Matter still were not covered.

The insured company purchased a $200 million tower of D&O insurance. The primary policy afforded coverage for a Securities Claim against the Insured and for a Claim against Insured Persons. When the company tendered the SEC Matter to the primary and first excess carriers for coverage, they denied coverage. The insured company sued the insurers in New York federal court. The New York federal court determined that the SEC Matter did not constitute a Securities Claim against the insured company and, in the alternative, held that the SEC Matter did not constitute a Claim against Insured Persons. Subsequently, the insured company sued the second excess carrier in the Superior Court of Delaware.

First, the Delaware court held that, because the second excess policy followed form to the primary policy, collateral estoppel barred the insured from relitigating whether the SEC Matter constituted a Securities Claim. Collateral estoppel did not preclude the company from relitigating whether the SEC Matter constituted a Claim against Insured Persons because the New York federal court only made that determination as an alternative holding. However, the Delaware court held that the SEC Matter did not constitute a Claim against Insured Persons because no part of the SEC Matter identified any individuals as the subject of the investigation; instead, the company was the clear target because SEC communications stated that the SEC was conducting an inquiry into the company and sent the letter solely to the company. 

Finally, the Delaware court rejected the insured’s argument that defense costs for the SEC Matter should be covered because there was significant overlap between the defense of that matter and two separate Claims. Because the Policy required covered defense costs to result “solely from the investigation, adjustment, defense and/or appeal of a Claim against an Insured,” the Policy did not afford coverage for defense costs incurred in connection with the non-covered SEC Matter.