Massachusetts Court Allows Consideration of Extrinsic Evidence

In its recent decision in BioChemics, Inc. v. AXIS Reinsurance Co., 2013 U.S. Dist. LEXIS 111218 (D. Mass. Aug. 7, 2013), the United States District Court for the District of Massachusetts had occasion to consider when an insurer is entitled to rely on extrinsic evidence for determining its duty to defend.

AXIS insured BioChemics under a claims made and reported directors and officers policy for the period November 13, 2011 to November 13, 2012.  BioChemics sought a defense in connection with an SEC enforcement action filed during the period the policy was in effect.  BioChemics also sought a defense for two SEC subpoenas issued by the SEC during the policy period.  AXIS, however, took the position that BioChemics was not entitled to coverage for these matters because they related back to a series of subpoenas served by the SEC prior to the policy’s date of inception, at a time when BioChemics was insured by a different carrier.   In support of its position, AXIS relied on a provision in its policy’s Limits of Liability section stating that:

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 . . . .

Notably, the subpoenas served by the SEC both prior to and subsequent to the AXIS policy’s date of inception all had the same SEC matter identification and number.

BioChemics filed a declaratory judgment action and subsequently moved for summary judgment on the duty to defend before the commencement of discovery, asserting that the duty to defend is based solely on the complaint and the policy, and that as such, discovery was not necessary.  AXIS opposed the motion, asserting that at the very least, it was entitled to discovery into communications between BioChemics and the SEC so that it could confirm whether, in fact, the subpoenas served prior to its policy’s inception were interrelated with the subsequent subpoenas and the enforcement action, thus comprising a “single, ongoing claim” first made prior to the policy period.

The court acknowledged a line of cases cited by BioChemics standing for the proposition that insurers cannot rely on extrinsic evidence for the purpose of determining a duty to defend.  The court went on to note, however, that this line of cases does not apply to extrinsic facts that will not be litigated in the underlying matter.  The court further observed that in the context of claims made and reported policies, the rule against consideration of extrinsic facts cannot be rigidly applied since coverage issues such as the timing of the claim are unlikely to be alleged in the underlying complaint.  While the court acknowledged it a close question, it ultimately held that:

… 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.

As such, the court allowed AXIS to proceed with discovery into the interrelatedness issue, and denied BioChemics’ motion for summary judgment without prejudice.  The court further held that under Massachusetts law, AXIS was not required to provide BioChemics with a defense pending determination of the duty to defend issue.