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Appellate court rules against Liberty Mutual unit in D&O litigation

Posted On: Mar. 30, 2023 1:25 PM CST


A federal appeals court on Wednesday overturned a lower court and ruled in favor of a biotechnology company in a directors and officers liability insurance policy dispute over coverage and $1.1 million in legal fees.

Bothell, Washington-based Cocrystal Pharma Inc., formed through a merger between Biozone Pharmaceutical Inc. and Cocrystal Discover Inc. in January 2014, had a D&O policy with Liberty Mutual Insurance Group unit Liberty Insurance Underwriters Inc. according to the ruling by the 3rd U.S. Circuit Court of Appeals in Philadelphia in Liberty Insurance Underwriters Inc. v. Cocrystal Pharma Inc.

In October 2014, the U.S. Securities and Exchange Commission subpoenaed Cocrystal Pharma, requesting documents about it and its predecessor, Biozone. It appeared the SEC was mainly interested in Biozone, but it also sought Cocrystal documents, according to the ruling.

Liberty Mutual paid Cocrystal $1.1 million for the defense costs incurred in responding to the SEC’s subpoena. Based on the enforcement action, private plaintiffs filed three lawsuits against the company.

Although the enforcement action and the lawsuits were filed after the policy period ended, Cocrystal sought coverage, arguing the post-policy actions should merge into one claim made within the policy period.

Liberty denied coverage and filed suit against Cocrystal in U.S. District Court in Wilmington, Delaware, seeking a declaration of no coverage and recoupment of the $1.1 million. 

Cocrystal countersued, seeking a declaration of coverage and bad-faith denial of coverage, as well as to prevent Liberty’s recoupment of defense costs paid.

The district court ruled in the insurer’s favor and was overturned by a three-judge appeals court panel.

“The document requests in the subpoena show the SEC could potentially bring enforcement actions against Cocrystal directors and officers, depending on the results of its investigation,” the ruling said.

“Given how broadly Delaware courts apply the duty to defend, this potential of future liability is enough to trigger coverage,” it said in vacating the district court’s summary judgment and remanding the case for trial.

Attorneys in the case did not respond to requests for comment.