A federal district court in Los Angeles has refused to dismiss directors and officers liability coverage litigation filed by a biotech company that has incurred $1.4 million in legal fees and costs to date in defending a lawsuit filed by a former employee.

Partner Re Ireland Insurance DAC issued a D&O policy for the period December 2018 to December 2020 to San Diego-based Skye Bioscience Inc., according to last week’s ruling by the district court in Skye Bioscience Inc. v. Partner Re Ireland Insurance DAC.

The policy, which was for $5 million in aggregate subject to a $250,000 per claim retention, provided coverage for losses resulting from any securities claim made against the company for a wrongful act, the ruling said.

During the policy period, Skye received a demand from a former Skye employee, who alleged wrongful termination after complaining about Skye’s alleged misconduct, including various violations of federal securities law, the ruling said. 

The former employee alleged the termination amounted to retaliation under the 2002 Sarbanes Oxley Act., in a lawsuit filed against Skye in U.S. District Court in Santa Ana, California.

Partner Re denied coverage in the case based on its interpretation of the phrase “securities claim” in its coverage.

As a result, Skye funded its own defense, paying about $1.4 million to date in defense costs and fees, while a jury awarded the former employee $4.9 million in damages.

That lawsuit is ongoing, as the parties file post-trial motions and Skye continues to incur legal fees and costs in connection with its defense.

In its lawsuit against Partner Re, Skye charges the insurer with breach of its contractual duty to provide coverage and its implied covenant of good faith and fair dealing and with bad faith, and seeks damages for the legal fees and costs incurred to date in defending the lawsuit.

“Skye has plausibly alleged that the ... lawsuit is covered by the policy”, the ruling said. “As Skye argues, Sarbanes Oxley is defined as a ‘securities law’ in the Securities Exchange Act of 1934,” it states.

“In particular, to the extent that Partner Re has a duty to defend under the policy, Skye has plausibly alleged that Partner Re breached its duty given the ‘exceedingly broad contours of an insurer’s duty to defend’ under New York law,” it said, citing an earlier case.

Skye attorneys Shaun Crosner and Jacquelyn Mohr Heitman, Manhattan Beach, California-based partners with Pasich LLP, said in a statement, “We are pleased with the decision and believe the court correctly applied the governing legal principles. We and our client look forward to litigating this case on the merits.”

The insurer’s attorneys did not respond to a request for comment.