Axis Insurance Co. is not obligated to indemnify a private equity firm in connection with a Securities and Exchange Commission-related investigation under its directors and officers liability coverage because of a warranty agreement, says a federal appeals court ruling, in upholding a lower court’s decision.

New York-based Patriarch Partners LLC received a letter from the SEC informing it of an “informal inquiry” by the agency in December 2009, according to Wednesday’s ruling by the 2nd U.S. Circuit Court of Appeals in New York in Patriarch Partners LLC v. Axis Insurance Co. This eventually led to a subpoena issued again the company in February 2012.

Meanwhile, in 2011, Patriarch was in the process of renewing its D&O professional liability insurance portfolio. In previous years, Patriarch had maintained a D&O tower comprised of several polices totaling $20 million in policy limits, including a primary policy with a $10 million limit issued by Continental Casualty Co., a unit of Chicago-based CNA Financial Corp.; a $5 million first-level excess policy issued by Cincinnati-based Great American Insurance Co., and a $5 million second-level excess policy issued by Illinois National Insurance Co., an American International Group Inc. unit.

In August 2011, Patriarch’s broker recommended it purchase a third, $5 million excess layer extending its policy limits to $25 million. Patriarch accepted an Axis quote for the coverage and agreed to a warranty intended “to eliminate the potential for Axis to come on the program and be immediately hit with a claim that the client knew was close but hadn’t been filed yet,” said the ruling.

In February 2012, just over six months after the Axis policy became effective, the SEC served Patriarch with a subpoena, and followed this up more than three years later with an administrative enforcement action, according to the ruling.

In the intervening years, the costs of defending the SEC proceedings had depleted all of Patriarch’s underlying $20 million of D&O coverage, said the ruling. 

In August 2015, Patriarch notified Axis it had exhausted its underlying coverage and asked Axis to assume the obligation to cover defense costs. Axis denied coverage.

Litigation filed by both parties ensued in U.S. District Court in New York, which ruled that the SEC investigation was a claim that was pending prior to the Axis policy’s inception.

A three-judge appeals court panel ruled in Axis’ favor on the basis of the warranty. “By August 12, 2011, the effective date of the Warranty, Patriarch ‘was aware’ of the SEC Order of Investigation, the escalating severity and focus on the SEC investigation, the subpoena of a former employee and notice of an impending subpoena to be issued to Patriarch itself,” said the ruling, in affirming the lower court’s decision.