CA District Court: Insurance Policy Covering Securities Claims May Extend To SOX Whistleblower Claims

• Published date: 31 August 2023
• Subject Matter: Corporate/Commercial Law, Employment and HR, Corporate and Company Law, Employment Litigation/ Tribunals, Securities, Whistleblowing
• Law Firm: Proskauer Rose LLP
• Author: Mr Lloyd Chinn and Pinchos Goldberg

A recent California district court addressed the question of whether, for insurance coverage purposes, a SOX whistleblower claim is a "securities claim," and answered that question in the affirmative. Skye Bioscience v. PartnerRe Ireland Insurance DAC, No. 23-cv-01218.

Section 1514A of SOX provides a cause of action for employees who face alleged retaliation because of certain lawful whistleblowing activity. 18 U.S.C. ' 1514A(a). Section 1514A differs from other provisions in SOX in that the elements of a SOX whistleblower retaliation claim focus on the employment relationship. Section 1514A provides for traditional employment remedies such as reinstatement and backpay, and it is administered by the Occupational Safety and Health Administration (OSHA) instead of the Securities and Exchange Commission (SEC).

These aspects of Section 1514A have led insurers to conclude that insurance coverage for securities claims does not extend to SOX whistleblower claims. For example, some insurers have assumed that liability arising from an employee termination should be covered by a company's Employment Practices Liability (EPL) insurance instead of a Directors, Officers, and Company Liability (D&O) insurance which ordinarily covers losses from securities claims. See, e.g., In re Verizon Ins. Coverage Appeals, 222 A.3d 566, 574 (Del. 2019) (narrowly interpreting similar policy language to only cover claims which are specifically relating to securities); Kollman v. Nat'l Union Fire Ins. Co., 2007 WL 2344825, at *3 (D. Or. Aug. 13, 2007), aff'd, 542 F. App'x 649 (9th Cir. 2013) (breach of contract claim involving securities transactions was not covered under policy for securities claims).

The Skye Bioscience decision may cause insurers to reconsider this assumption.

Background

Skye Bioscience, Inc. was sued by a former employee who alleged that the company terminated her after she reported alleged securities law violations, in violation of the SOX whistleblower protections. Skye then sought coverage from its insurer PartnerRe Ireland Insurance DAC under a D&O policy that covered "Securities Claim[s]," which was defined to include violations of the Securities Act of 1933, the Securities Exchange Act of 1934, related rules or regulations and "similar securities laws or regulations . . . arising out of . . . the ownership, purchase, sale or distribution of or offer to purchase, sell, or distribute any securities of the Company."

Adopting the arguments advanced by insurers...