Insurability Update: New York High Court Confirms Coverage of Settlement Amount Labeled ‘Disgorgement’ | Pillsbury – Policyholder Pulse Blog


Last month, we discussed a Northern District of Illinois decision finding an amount labeled “refund” in a settlement between a drug company and the Department of Justice was an insurable loss under a policy. DO. Shortly after that post, the New York Court of Appeals reached a similar conclusion, continuing the trend to look beyond the labels used for payments in the underlying settlement agreement. In rejecting the insurers’ argument, the court assessed the purpose of the payments and the nature of how they were calculated to conclude that the payments in question were insurable under a professional liability policy, although they are called “restitution”.

The recent decision of JP Morgan Securities Inc. v. Vigilant Insurance Company is the culmination of more than a decade of coverage litigation relating to alleged securities breaches by Bear Stearns between 1999 and 2003. The SEC began investigating Bear Stearns for facilitating some of its clients in “Deceptive Late Trading and Market Timing Practices” related to the buying and selling of mutual fund units. Bear Stearns notified the investigation to its professional liability insurers, who denied coverage. In 2006, Bear Stearns entered into an agreement with the SEC. Under the terms of the settlement agreement, the SEC listed its “findings” that Bear Stearns committed violations of late trade facilitation and misleading market timing. Bear Stearns accepted a $ 160 million “disgorgement” payment and a $ 90 million “civil fine” payment “without admitting or denying the findings” of the SEC. Both payments were to be placed in a fund administered by the SEC to compensate mutual fund investors harmed by the conduct of Bear Stearns and its clients. The settlement agreement also provided that the civil fine of $ 90 million was not eligible to offset amounts Bear Stearns owed to private litigants who had brought action against Bear Stearns alleging injury resulting from the same behavior. The aim of making the civil sanction ineligible to compensate for other losses was to “preserve the deterrent effect of the civil sanction”. The civil penalty should also be treated as a tax penalty.

After several rulings on both sides by the lower courts, and a decision of the Court of Appeal in 2013 according to which the payment qualified as “reimbursement” was “not clearly uninsurable for a matter of public order The case returned to the High Court to decide on the $ 140 million coverage of the $ 160 million “restitution” payment. Bear Stearns argued that this payment represented the reimbursement of his client illegal profits, not his own profits, and therefore was an insurable loss. The remaining insurers in the case argued that the payment was not for the client’s earnings but for Bear Stearns’ own earnings, and was a “penalty imposed by law”, which was excluded from the definition of the “loss” policy.

The New York Court of Appeals concluded that to the extent that the policy’s definition of “loss” excludes certain types of payments from coverage, it acts as an exclusion, the application of which is the responsibility of insurers to prove. The court went on to find that insurers had failed to meet their onus of proving that a reasonable policyholder would have understood the phrase “penalties imposed by law” to exclude the payment of $ 140 million. The court based this decision on the common understanding that the term “fine” refers to an amount greater than the actual damage suffered by a party and is distinct from a compensable remedy measured by the amount of the damage caused by a wrongdoing. Bear Stearns presented evidence that the $ 140 million of the payment represented an assessment of the gains by Bear Stearns customers and the corresponding harm suffered by investors. The payment also served a compensatory purpose for the victims of the alleged wrongdoing. The court likened the process of setting the amount of this payment to the payment of a “civil fine” of $ 90 million, which was unrelated to any measure of harm or profit arising from the business practices. These factors led the court to decide that at the time of settlement the payment of $ 140 million “could not properly have been considered a” penalty “in the context of this professional liability insurance policy for wrongdoing ”.

The main takeaway from this decision remains the growing skepticism of the courts towards insurers’ arguments that “restitution” and “reimbursement” are not insurable, especially when these terms are merely labels used by the government in its claims. settlements with the insured. When the courts look at the facts and the purpose of the payments, and go beyond the labels, they increasingly find that they are covered by management liability insurance policies.

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