Bear Stearns’ insurers were recently dealt a fatal blow, when the trial court granted Bear Stearns’ motion for summary judgment and denied all insurers’ motions (and defenses). See J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2017 N.Y. Slip Op. 27127, 11 (N.Y. Sup. Ct. 2017). The court found that the documentary and testamentary evidence presented by Bear Sterns overwhelmingly demonstrated that Bear Stearns’ misconduct profited their customers instead of resulting in Bear Stearns’ own “ill-gotten gains.” The court also found the settlement amounts reached by Bear Stearns in the SEC action and the private civil suits to be reasonable.
In addition, the court found that the policies’ various exclusions inapplicable. Importantly, it found that Personal Profit exclusion did not apply, stating that the exclusion applies only where loss is based on personal profit or advantage that: 1) is unlawful; and 2) that was actually derived by the insured. Because the SEC order contained no findings or allegations that Bear Stearns’ profit from its customers’ late trading was itself illegal, the exclusion did not apply. The court also cautioned that the insurers’ application of this exclusion would unreasonably expand the exclusion to bar virtually all coverage for securities violations—rendering coverage illusory. The court likewise found the Prior Knowledge Exclusion inapplicable on grounds that the language used was ambiguous, and thus was required to be interpreted in favor of coverage for Bear Stearns.
This decision comes after the New York Court of Appeals previously reinstated Bear Stearns’ complaint, reversing the intermediate appellate court’s dismissal on grounds that the SEC disgorgement settlement represented “Ill-gotten gains” and was thus uninsurable on public policy grounds. See J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324, 333, 992 N.E.2d 1076, 1080 (2013). The Court of Appeals disagreed, finding dismissal inappropriate and suggesting that coverage would not be precluded where the alleged ill-gotten gains were the gains of others, and not the insured.
The trial court’s latest knockout of the insurers’ coverage arguments is important because Directors & Officers (D&O) and professional liability insurers frequently contend that public policy or policy exclusions preclude coverage for a loss they deem to seek “disgorgement” or “ill-gotten gains.” The opinion also reinforces that settlements made by insureds, even with regulatory agencies, cannot trigger policy exclusions such as the dishonest acts or ill-gotten gains exclusions, where the settlement does not assert such prohibited conduct. Finally, the opinion reiterates the New York Court of Appeals’ finding that even expressly labeling a settlement as “disgorgement” will not trigger the public policy exception to coverage or other related exclusions if the “disgorgement” is of the ill-gotten gains of profits to parties other than the insured.
The decision underscores the need for policyholders to closely review all positions and defenses asserted by carriers in response to a claim and, when appropriate, push back on a carrier’s reservations of rights on coverage for damages sought by a claimant.