Biochemics, Inc. v. Axis Reinsurance Company

Filing 47

Judge Rya W. Zobel: Memorandum of Deicision entered granting 37 Motion for Discovery; denying 28 Motion for Partial Summary Judgment; denying 32 Motion to Stay (Urso, Lisa)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 13-10691-RWZ

BIOCHEMICS, INC.,
and JOHN MASIZ
v.
AXIS REINSURANCE COMPANY, et al.

MEMORANDUM OF DECISION

August 7, 2013

ZOBEL, D.J.
In December 2012, the Securities and Exchange Commission (“SEC”) filed an
enforcement action against plaintiffs BioChemics, Inc. (“BioChemics”) and John Masiz,
alleging they had violated the federal securities laws. Plaintiffs have now sued
defendant AXIS Reinsurance Company (“AXIS”),1 which issued their directors and
officers (“D&O”) liability insurance. Plaintiffs claim their D&O insurance policy obligates
AXIS to defend them against the pending enforcement action, and against subpoenas
issued by the SEC in January and March 2012. AXIS has refused to provide plaintiffs
any defense against the subpoenas or against the enforcement action, claiming those
matters are not covered under plaintiffs’ policy. Plaintiffs have now moved for summary
judgment, and AXIS has responded by moving for discovery under Federal Rule of Civil

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Plaintiffs have also brought claims in this same action against two other defendants, namely
their insurance brokerage firm and an individual broker. Those claims are not at issue here.

Procedure 56(d).
I. Background
BioChemics is a specialty pharmaceutical company focused on transdermal drug
delivery systems, including medicated lotions. Masiz is BioChemics’s president and
chief executive officer.
In May 2011 and September 2011, the SEC served document subpoenas on
BioChemics requesting a broad range of documents regarding the company’s
operations from 2007 on. Those subpoenas indicated that the SEC had issued a formal
order authorizing the pending investigation. At the time, BioChemics held a year-long
D&O policy issued by Greenwich Insurance Company, a member of the XL Group. That
policy was written on a claims-made basis, meaning it only covered claims made
against BioChemics or its officers during the policy period.
In November 2011, when its D&O policy expired, BioChemics did not purchase a
new policy from the same insurers; instead, it took out a new policy from AXIS.2 The
new AXIS policy was also issued on a claims-made basis, covering claims first made
between November 13, 2011 and November 13, 2012. Section V.A of the policy, titled
“Limits of Liability,” contained the following language:
All Claims, including all D&O Claims . . . arising from the same Wrongful
Act . . . and all Interrelated Wrongful Acts shall be deemed one Claim and
such Claim shall be deemed to be first made on the earlier date that: (1)
any of the Claims is first made against an Insured under this Policy or any
prior policy . . . .

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The circumstances surrounding BioChemics’s switch to a new insurer are the subject of
plaintiffs’ claims against the other defendants in this case.

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Docket # 30, Ex. A (Policy), § V.A.3 The same section also stated the basic principle of
a claims-made policy: “Coverage under this Policy shall apply only with respect to
Claims deemed to have been first made during the Policy Period and reported in writing
to the Insurer in accordance with the terms herein.” Id. The policy defined a “Claim”
broadly to include, inter alia, any “written demand against any Insured for monetary or
nonmonetary relief,” or any “civil, arbitration, administrative or regulatory proceeding
against any Insured commenced by . . . the filing of a notice of charge, investigative
order, or like document.” Id. § III.B.2(a), (b)(ii).
In January 2012, two months after the AXIS policy came into effect, the SEC
served deposition subpoenas on Masiz and two other individuals. In March 2012, the
SEC served document subpoenas on BioChemics and Masiz. Those subpoenas all
issued under the same SEC matter identification and number—In the Matter of
BioChemics, Inc. (B-02641)—that the 2011 subpoenas had. The March document
subpoena to Masiz also emphasized that Masiz was not required to produce any
documents that had already been provided in response to the 2011 subpoenas to
Biochemics. See Docket # 30, Ex. G, Subpoena Attachment at 3-4.
BioChemics notified AXIS of the January and March 2012 subpoenas. However,
AXIS denied coverage. It took the position that the entire SEC investigation was a
single “claim” that was first made in May 2011, when the SEC issued its first document
subpoena to BioChemics—before plaintiffs’ AXIS policy took effect.

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Underlined terms, which appear in bold type in the policy itself, are defined elsewhere in the
agreement.

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The SEC filed its enforcement action in December 2012, alleging that from 2009
until mid-2012 BioChemics and Masiz had engaged in a fraudulent scheme to sell
BioChemics securities by misleading investors about the company’s value. Some of the
misrepresentations alleged in the SEC complaint took place before the SEC issued its
first document subpoena in May 2011. Others, including alleged misrepresentations
about a clinical trial of BioChemics’s topical ibuprofen product, took place after the May
and September 2011 subpoenas had issued.
AXIS has taken the same position with respect to the SEC enforcement action as
it did with respect to the 2012 subpoenas: namely, it has refused to defend BioChemics
and Masiz, asserting that the enforcement action is part of a single “claim” that was first
made when the first SEC subpoena issued in May 2011, before the AXIS policy period
began.
Plaintiffs now move for partial summary judgment, insisting that the present
record is enough to conclusively determine whether AXIS owes them a duty to defend.
In response, AXIS has moved for discovery under Rule 56(d), arguing that it is entitled
to examine all the communications between plaintiffs and the SEC to determine
whether it has any duty to defend.
II. Analysis
Rule 56(d) applies when a party opposing summary judgment shows that for lack
of time or lack of discovery, “it cannot present facts essential to justify its opposition.”
Fed. R. Civ. P. 56(d). Under those circumstances, the court may deny the summary
judgment motion, defer consideration, provide additional time for discovery, or issue
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any other appropriate relief. Id. To invoke Rule 56(d), the party must submit a
statement that “(i) explains his or her current inability to adduce the facts essential to
filing an opposition, (ii) provides a plausible basis for believing that the sought-after
facts can be assembled within a reasonable time, and (iii) indicates how those facts
would influence the outcome of the pending summary judgment motion.” NievesRomero v. United States, 715 F.3d 375, 381 (1st Cir. 2013) (quoting Velez v. Awning
Windows, Inc., 375 F.3d 35, 40 (1st Cir. 2004)).
Here, the parties dispute only whether the facts that AXIS seeks would influence
the outcome of plaintiffs’ summary judgment motion. Plaintiffs insist that AXIS will owe
them a defense no matter what further discovery might reveal; AXIS disagrees.
A. Extrinsic Evidence
Plaintiffs argue their D&O insurance policy establishes on its face that AXIS
owes them a duty to defend against the SEC proceedings. The relevant insuring clause
of the policy states that AXIS will pay “all Loss on behalf of any Insured arising from
any D&O Claim for a Wrongful Act . . . first made against such Insured . . . during the
Policy Period.” Policy § I. Because the defined term “Loss” includes the cost of
defending against claims, see id. §§ III.A.2, III.A.7, plaintiffs argue that AXIS must pay
for their defense against the 2012 subpoenas and the subsequent SEC enforcement
action.
AXIS counters that the 2012 subpoenas and the enforcement action are part of
a single, ongoing claim that was “first made” before the policy period began. As
described above, the policy provides that “all D&O Claims . . . arising from the same
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Wrongful Act . . . and all Interrrelated Wrongful Acts shall be deemed one Claim.” Id. §
V.A. It defines the term “Interrelated Wrongful Acts” to mean “any and all Wrongful Acts
that have as a common nexus any fact, circumstance, situation, event, transaction,
cause, or series of causally or logically connected facts, circumstances, situations,
events, transactions, or causes.” Id. § III.A.6. AXIS contends that after discovery, it
could prove that the “Wrongful Acts” underlying the 2011 subpoenas shared a common
nexus with the “Wrongful Acts” underlying the 2012 subpoenas and the enforcement
action. If so, AXIS argues, any claims arising from those “Interrelated Wrongful Acts”
would be deemed a single “Claim” that arose when the first subpoena was filed—before
the policy period began. That would place the entire SEC investigation outside the
scope of AXIS’s duty to defend under the policy. AXIS therefore seeks discovery of
materials related to the plaintiffs’ dealings with the SEC, to show that the entire
investigation arises from a single set of “Interrelated Wrongful Acts.”
Plaintiffs respond with a line of cases holding that in general, insurers cannot
rely on extrinsic evidence to deny their duty to defend. Instead, normally speaking, “the
question of the initial duty of a liability insurer to defend third-party actions against the
insured is decided by matching the third-party complaint with the policy provisions.”
Fed. Ins. Co. v. Raytheon Co., 426 F.3d 491, 496 (1st Cir. 2005) (quoting Cont’l Cas.
Co. v. Gilbane Bldg. Co., 461 N.E.2d 209, 212 (Mass. 1984)). That rule establishes, for
instance, that an insurer cannot avoid its duty to defend by claiming that the suit
against its insured lacks merit. See Bos. Symphony Orchestra v. Commercial Union
Ins. Co., 545 N.E.2d 1156, 1159 (Mass. 1989) (“The merits of the claim are, likewise,
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not a ground upon which an insurer can refuse to defend its insured. . . . [T]he right to a
defense inures even if any of the allegations of the suit are groundless, false, or
fraudulent.” (quotation marks omitted)).
Extrapolating from this rule, plaintiffs argue that AXIS can only avoid its duty to
defend if the later SEC subpoenas and complaint themselves make clear, within their
own four corners, that they arise from the same “Interrelated Wrongful Acts” as the
earlier subpoenas. Cf. Raytheon, 426 F.3d at 496-97 (determining the scope of a prior
and pending litigation exclusion by looking to the allegations of the complaints at
issue); Ryan v. Nat’l Union Fire Ins. Co., 692 F.3d 162, 167-68 (2d Cir. 2012) (under
Connecticut law, finding insurer had a duty to defend where based solely on the
allegations in the complaint it was “possible” that not all the alleged losses arose from
earlier wrongful acts). According to plaintiffs, no factual discovery is necessary because
AXIS’s duty to defend rests solely on the subpoenas and the complaint.
AXIS, unsurprisingly, takes a different view. It argues that the rule against using
extrinsic evidence applies only where the insurer seeks to challenge the allegations of
the third party’s complaint, not where the insurer is challenging an “extrinsic fact . . .
that will not be litigated at the trial of the underlying action.” Farm Family Mut. Ins. Co.
v. Whelpley, 767 N.E.2d 1101, 1104 (Mass. App. Ct. 2002). That approach finds
support in the case law. For instance, the First Circuit has held—applying Maine
law—that a court may look to extrinsic evidence to determine whether the insured party
under a claims-made policy timely reported the claim. Edwards v. Lexington Ins. Co.,
507 F.3d 35, 40-41 (1st Cir. 2007). It stated that the rule against extrinsic evidence
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“cannot be rigidly applied in the context of claims-made policies where the
determinative event is the timing of the claim, a fact that likely will be . . . irrelevant to
the merits of the underlying tort suit, and therefore absent from the pleadings.” Id. at 41.
So too here. The determinative question is whether the later subpoenas and
enforcement action arose from alleged wrongful acts that shared a common nexus with
the alleged wrongful acts that triggered the earlier subpoenas. The existence vel non of
that common nexus is not relevant to the validity of the subpoenas or the merits of the
enforcement action, and is not likely to appear on the face of the subpoenas or the
complaint. So under the First Circuit’s reasoning in Edwards, AXIS should be entitled to
prove it by extrinsic evidence. See also Whelpley, 767 N.E.2d at 1104 (allowing the
insurer to prove by extrinsic evidence that the underlying accident occurred off the
insured’s premises and so was not covered by the policy).
Though the question is close, AXIS has the better of the argument. An insurer
may not use extrinsic evidence to avoid its duty to defend by challenging the
allegations in the complaint; instead, the insurer must defend if the allegations in the
complaint are reasonably susceptible to an interpretation that states a claim within the
scope of the policy. See Sterilite Corp. v. Cont’l Cas. Co., 458 N.E.2d 338, 340 (Mass.
App. Ct. 1983). But an insurer may use extrinsic evidence to deny a duty to defend
based on facts irrelevant to the merits of the underlying litigation, such as whether the
claim was first made during the policy period, whether the insured party reported the
claim to the insurer as required by the policy, or whether the underlying wrongful acts
were related to prior wrongful acts. See Edwards, 507 F.3d at 40-41; Brown v. Am. Int’l
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Grp., 339 F. Supp. 2d 336, 346-47 (D. Mass. 2004) (citing extrinsic evidence in finding,
after a full bench trial, that defendant insurer had failed to prove the wrongful acts at
issue were related to prior wrongful acts). The discovery AXIS requests may therefore
affect the outcome of plaintiffs’ summary judgment motion.
B. Interrelated Wrongful Acts
Next, plaintiffs turn to the fact that the complaint in the SEC enforcement action
alleges certain misrepresentations that took place after the 2011 subpoenas issued.
Specifically, the SEC complaint alleges that beginning on November 2011, plaintiffs
made several misrepresentations about the results of a clinical trial for a topical
ibuprofen cream being developed by BioChemics. Plaintiffs argue that because these
alleged misrepresentations occurred after the earlier SEC subpoenas, they cannot be
interrelated with the wrongful acts underlying the earlier subpoenas.
That argument fails. As noted above, the policy defines “Interrelated Wrongful
Acts” to mean “any and all Wrongful Acts that have as a common nexus any fact,
circumstance, situation, event, transaction, cause, or series of causally or logically
connected facts, circumstances, situations, events, transactions, or causes.” Policy
§ III.A.6. Therefore, the question is not whether the earlier subpoenas sought
information about the later ibuprofen-related misrepresentations; they obviously did not.
Instead, the question is whether the earlier subpoenas sought information about
wrongful acts that shared a “common nexus” with the later ibuprofen-related
misrepresentations. That question cannot be resolved until the parties have taken

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sufficient discovery.4 Cf. Brown, 339 F. Supp. 2d at 346-47; Allmerica Fin. Corp. v.
Certain Underwriters at Lloyd’s, London, 871 N.E.2d 418, 430 (Mass. 2007) (“While we
cannot say that the underwriters will be unable to show that the claims were
‘interrelated’ in any circumstances, they have not done so on the record before us.”).5
C. Limits of Liability
Next, plaintiffs argue that because section V.A of the policy is titled “Limits of
Liability,” it should be interpreted to limit the total amount of coverage but not to act as
a complete bar to coverage. They rest on the well-established principle that when
construing language in an insurance policy, a court must look to what an objectively
reasonable insured party would expect to be covered based on the policy language.
See W. Alliance Ins. Co. v. Gill, 686 N.E.2d 997, 998 (Mass. 1997).
Here, however, the language at issue is unambiguous. It states clearly that all
claims based on interrelated wrongful acts shall be deemed one claim, and that the
resulting single claim shall be deemed first made when the first underlying claim was
made (or when an insured party first provided notice of the underlying facts). The final
sentence of section V.A then unambiguously states its intent to exclude certain claims
from coverage: “Coverage under this Policy shall apply only with respect to Claims
deemed to have been first made during the Policy Period and reported in writing to the

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I note that the SEC complaint strongly indicates the relevant wrongful acts were interrelated,
since it alleges that the ibuprofen-related misrepresentations were just one part of a larger fraudulent
scheme dating back to 2009. But I naturally do not decide that issue at this time.
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Plaintiffs also argue that each later subpoena constitutes a separate claim under the policy
because each is a new “written demand against an Insured for monetary or non-monetary relief.” Policy
§ III.B.2.a. But the important question is whether all of these separate claims are deemed a single claim
because they all arise from interrelated wrongful acts. See id. § V.A.

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Insurer in accordance with the terms herein.” Policy § V.A; see also id. at 1 (stating, in
bold print and in all capitals, that the policy covers only claims first made during the
policy period). Given that language, a reasonable insured could not have ignored that
section V.A of the policy bars coverage for a claim deemed to be first made before the
policy period—including any later claims based on the same interrelated wrongful acts.
D. Masiz
Finally, plaintiffs argue that the 2011 subpoenas cannot be considered prior
claims against Masiz, because they were only directed to BioChemics. AXIS responds
that it cannot assess whether any relevant prior claims were filed against Masiz until it
discovers the full extent of the prior communication between plaintiffs and the SEC.
That response has merit. Any written demands on Masiz made before the policy period
began would potentially be relevant to the scope of AXIS’s duty to defend. AXIS is
therefore entitled to discover the relevant prior communications between plaintiffs and
the SEC, and the scope of the SEC’s prior investigation.6
E. Ongoing Defense Costs
Finally, plaintiffs argue that AXIS should be required to provide plaintiffs a
defense until the scope of its duty to defend is conclusively determined. Of course,
when there is a legitimate dispute about an insurer’s duty to defend, the insurer will
often provide a defense under a reservation of rights. See, e.g., Vicor Corp. v. Vigilant
Ins. Co., 674 F.3d 1, 16 (1st Cir. 2012) (noting the defendant insurers had provided a

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I need not now decide, and do not now decide, whether AXIS could rely on the 2011 subpoenas
alone as previous claims that would justify denying coverage to Masiz.

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defense “[s]ubject to a reservation of rights because of potential coverage issues”).
Some states may even require that course. See, e.g., Axis Reinsurance Co. v. Bennett,
Civil Action No. 07-7924-GEL, 2008 WL 2600034, at *2 (S.D.N.Y. June 27, 2008)
(holding that New York law generally requires insurers to advance defense expenses
where coverage is disputed); cf. Little v. MGIC Indem. Corp., 836 F.2d 789, 793-94 (3d
Cir. 1987) (requiring insurer to advance costs under Pennsylvania law based on the
specific policy at issue); Assoc. Elec. & Gas Ins. Servs. v. Rigas, 382 F. Supp. 2d 685,
699-700 (E.D. Pa. 2004) (same). However, plaintiffs cite no Massachusetts law
requiring an insurer to defend the insured pending resolution of coverage issues, and I
have found none. Instead, Massachusetts apparently permits an insurer to refuse to
defend its insured; the insurer simply risks liability for the defense costs that the
insured party incurs (which may be higher than if the insurer had provided a defense).
See, e.g., Preferred Mut. Ins. Co. v. Gamache, 686 N.E.2d 989, 991 (Mass. 1997). In
addition, the insurer risks liability for “the reasonable attorney’s fees and expenses
incurred [by the insured] in successfully establishing the insurer’s duty to defend under
the policy.” Id. at 993.
In sum, nothing in Massachusetts law or in the policy itself requires AXIS to
provide an interim defense while the issue of coverage is being decided. It would
therefore be inappropriate to order that relief.
F. Resolution
Given the guidance provided by this opinion, plaintiffs may wish to present new
arguments for summary judgment after discovery. Therefore, the most appropriate
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decision is to deny plaintiffs’ motion for partial summary judgment without prejudice.
See Fed. R. Civ. P. 56(d)(1). The parties can then proceed with discovery.
III. Conclusion
Plaintiffs’ motion for partial summary judgment (Docket # 28) and motion to stay
discovery (Docket # 32) are DENIED WITHOUT PREJUDICE. AXIS’s Rule 56(d)
motion (Docket # 37) is ALLOWED to that extent. The parties shall proceed with
discovery.

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AXIS’s motion for leave to file a reply brief (Docket # 43) is DENIED.

August 7, 2013
DATE

/s/Rya W. Zobel
RYA W. ZOBEL
UNITED STATES DISTRICT JUDGE

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