On September 23, 2013, the SEC began investigation of an investment advisory firm called F-Squared. An investigation order (the “Formal Order”) indicated that the SEC had information that tended to show that from at least January 1, 2009, F-Squared had distributed false and misleading advertisements to clients or prospective clients in violation of law.
On October 2, 2013, the SEC served a subpoena on F-Squared in connection with the investigation. On October 18, 2013, upon request from F-Squared, the SEC provided it with a copy of the Formal Order.
F-Squared had been issued a primary insurance policy by Columbia Casualty Company for two consecutive policy years. For the first year, October 3, 2012 to October 3, 2013, F-Squared had an excess policy from Federal Insurance Company, The total limit between the two insurers for that policy year was $10 million.
For the second policy year, October 3, 2013 to October 3, 2014 F-Squared had additional excess coverage from Zurich and XL, for a total of $20 million in coverage.
The policies were claims made policies that provided coverage for “any claim first made against F-Squared during the policy period.” The policies had a “deemed-made” clause under which a claim is deemed “first made” upon “an insured being identified by name in an order of investigation [or] subpoena . . . as someone against whom a civil. criminal, administrative or regular proceeding may be brought.”
F-Squared notified the insurers of the investigation and requested coverage under the policies. Columbia and Federal paid their combined $10 million policy limit for the 2012-2013 policy year.
The other excess insurers denied coverage on the basis that the SEC investigation constituted a claim that was first made prior to the 2013-2014 policy year.
F-Squared filed for bankruptcy. Craig Jalbert, in his capacity as trustee of the F2 Liquidating Trust, sued the excess insurers. He argued that the deemed-made clause was inapplicable because the Formal Order did not state that the SEC would bring a proceeding against F-Squared. He argued that the phrase “may be brought” in the deemed-made clause required a “reasonable possibility,” not a “weak possibility” of a claim. He asserted that the Formal Order did not indicate whether and to what extent SEC proceedings against F-Squared were a reasonable possibility.
In Jalbert v. Zurich Services Corp. 953 F.3d 143 (1st Cir. 2020), the United States Court of Appeals for the First Circuit disagreed. It held that the deemed-made clause precluded coverage because the word “may” in the clause required only notice of a possiblity that a proceeding will be brought, and the Formal Order expressed such a possibility.