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Jalbert v. The Zurich Services Corp.

United States District Court, D. Massachusetts

September 5, 2018

CRAIG JALBERT, in his capacity as Trustee for F2 Liquidating Trust
v.
THE ZURICH SERVICES CORPORATION, et al.

          MEMORANDUM OF DECISION

          RYA W. ZOBEL SENIOR UNITED STATES DISTRICT JUDGE

         This insurance recovery dispute arises from the SEC investigation and subsequent bankruptcy of F-Squared Investments, an investment management firm. Plaintiff Craig Jalbert brings this case in his capacity as trustee of the F2 Liquidating Trust to recoup from the company's excess insurers approximately $7.7 million in unreimbursed defense costs F-Squared incurred during the investigation.

         Defendants have moved for summary judgment, which motions are allowed.

         I. Factual Background

         The following facts derive from the parties' Statements of Undisputed Facts and responses thereto (Docket ## 39, 43, 45) and all documents filed therewith.

         A. The SEC Investigation

         On September 23, 2013, the SEC issued an “Order Directing Private Investigation and Designating Officers to Take Testimony” in a matter captioned “In the Matter of F-Squared Investments, Inc. (B-2855).” See Docket # 42-7. According to this non-public “Formal Order, ” the SEC had “information that tend[ed] to show that” F-Squared had distributed false and misleading advertisements “in possible violation of” federal securities laws. Id. at 5. Based on that information, the Formal Order directed “that a private investigation be made” and empowered the SEC to issue subpoenas, take evidence, and otherwise carry out the inquiry. See id. at 7-8.

         On October 2, 2013, the SEC's Division of Enforcement subpoenaed F-Squared in connection with the investigation, and on October 7 it issued two additional subpoenas to high-ranking F-Squared officers. After counsel for F-Squared specifically requested a copy of the Formal Order, the SEC shared it on October 18, 2013. Over the course of the next year, F-Squared incurred $17.7 million in defense costs responding to the investigation.

         B. F-Squared's Insurance Policies

         As is common in the industry, F-Squared maintained several “Directors & Officers” insurance policies intended to cover, inter alia, the costs associated with defending against a formal investigation by the SEC. For the 2012-2013 time period, it maintained two such policies: a Columbia Casualty Company (“Columbia”) policy that provided $5 million in coverage and a follow-form[1] policy issued by Federal Insurance Company (“Federal”) for an additional $5 million in excess coverage. The policies applied “only to any claim first made against [F-Squared]” between October 3, 2012 and October 3, 2013. Docket # 37-1 at 2.

         For the 2013-2014 time period, F-Squared renewed the Columbia and Federal policies and also purchased additional excess coverage from defendants Zurich American Insurance Company (“Zurich”) and XL Specialty Insurance Co. (“XL”). The Zurich and XL policies follow the form of the primary Columbia policy, with Zurich providing $5 million in second layer excess coverage (i.e., after exhaustion of the primary Columbia policy and first layer excess Federal policy), and XL, an additional $5 million beyond Zurich. The four 2013-14 policies apply “only to any claim first made against [F-Squared]” between October 3, 2013 and October 3, 2014. Docket # 37-3 at 2.[2]

         C. F-Squared's Notices to Insurers Regarding the SEC Investigation

         In emails sent November 7, 2013, F-Squared notified each of its insurers of the SEC investigation and claimed under each of the policies. Writing to Columbia, F-Squared requested coverage under the 2012-13 policy “or its renewal, which has not yet been received.” Docket # 37-7 at 4. Columbia eventually paid the full $5, 000, 000 limit of liability to F-Squared under the 2012-13 policy, and first-layer excess insurer Federal did likewise. Defendants Zurich and XL, however, denied coverage under their policies, giving rise to the instant dispute.

         D. Definition of a Claim; ...


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