The New York Supreme Court disposed of a longstanding dispute between J.P. Morgan and the insurers of the now defunct Bear Stearns, rejecting the insurers’ various arguments to avoid indemnity coverage for a $160 million payment made by Bear Stearns in connection to a 2006 settlement with the Securities and Exchange Commission (“SEC”) and New York Stock Exchange. As previously discussed in our August 2016 post about the prior motion for summary judgment order in this case, that settlement resulted from allegations that Bear Stearns, through its brokers, had facilitated late trading and deceptive market timing practices.
Posts by: Joseph Trujillo
The Ninth Circuit recently held in St. Paul Mercury Insurance Co. v. Federal Deposit Insurance Corp. that a D&O policy’s insured-versus-insured exclusion does not prevent the Federal Deposit Insurance Corporation (“FDIC”), as receiver of an insured failed bank, from obtaining coverage under such policy. In so doing, the Court of Appeals follows the Eleventh Circuit and other courts that have addressed this issue and sided with the policyholder. This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis. Just this week, a Georgia jury returned a verdict in favor of the FDIC that awarded almost $5 million in damages for claims relating to a bank’s negligent management by its former officers and directors.
The FDIC brought claims against the former directors and officers of Pacific Coast National Bank for negligence, gross negligence, and breaches of fiduciary duty. The FDIC alleged that the former directors’ pursued an aggressive lending strategy, failed to ensure that loan practices complied with the bank’s policies, and inadequately supervised subordinate officers, which led the bank to suffer millions of dollars in losses. The insurer, The Travelers Companies, Inc., which comprises appellant Saint Paul Mercury Insurance Company, filed a declaratory judgment action to establish that the policy does not cover the FDIC’s claims. Considering the parties’ cross-motions for summary judgment on the action, the district court rejected Travelers’ contention that the exclusion barred coverage, holding that the exclusion did not expressly bar claims by the FDIC.
On appeal, the key issue was whether the language of the exclusion, which barred coverage for claims brought “by or on behalf of any Insured or Company,” was ambiguous. The FDIC argued that the phrase “on behalf of,” as applied to its action against the directors, was ambiguous, relying on the facts that it initiated the underlying case almost three years after the bank’s failure and that no person from the bank had any involvement in bringing its claims.
A federal district court in the Eastern District of New York recently held that a D&O policy’s definition of “Loss” that includes amounts an insured is “legally obligated to pay” extends to consent judgments that forebear collection by the underlying plaintiffs. In Intelligent Digital Systems, LLC, v. Beazley Insurance Co., Inc., the court joined a majority of courts in other jurisdictions that have addressed the issue and rejected the insurer’s argument that because individual directors and officers had entered consent judgments in which the plaintiffs agreed not to collect against them, they had not suffered any “Loss” as defined by the policy. This ruling arose out of a series of stipulated agreements made in an underlying lawsuit by plaintiff Intelligent Systems, LLC against some former directors of the surveillance technology company, Visual Management Systems, Inc. In exchange for the directors’ assigning their coverage rights under their policy to Intelligent Systems, LLC, the underlying plaintiff agreed to “unconditionally forebear” its collection of the judgments against the insured directors. The agreement, however, expressly provided that the insured directors did not waive the right to assert a claim against the D&O insurer.
To reach this ruling, the Court considered a legal question of first impression under New York law: Does a consent judgment, with conditions effectively exculpating an insured from satisfying a judgment for which he might otherwise be personally liable, constitute an amount that the insured had become “legally obligated” to pay?
A New York trial court recently recognized that insurers may not deny coverage for a claim, and then, if the denial was improper, object to a policyholder’s settlement without their consent. The July 11, 2016 decision was issued by Justice Ramos in J.P. Morgan Securities, Inc., v. Vigilant Insurance Company Co., a case in which the policyholder sought coverage for investigation demands issued by the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) as well as related class actions alleging that Bear Stearns facilitated deceptive market timing and late trading activities. The insurer denied coverage, contending that the investigative demands were not “claims” as defined in the professional liability policy, and that even if they were claims, they sought the uninsurable relief of disgorgement. After receiving the insurer’s denial of coverage, Bear Stearns then settled the claims against it. The insurer objected, asserting that Bear Stearns failed to obtain its consent to the settlement, and similarly failed to cooperate with the insurer.
Seeking summary judgment, Bear Stearns asserted that it was permitted to settle the underlying claims without first obtaining the insurer’s consent because the insurer had already denied coverage. The court agreed, holding that although the policy’s consent to settlement provision is a condition precedent to coverage, if the insurer denies coverage, a policyholder is excused from complying with the consent provision. The insurer here repeatedly asserted in its coverage correspondence that the investigations did not appear to be “claims” and that any resulting relief would be uninsurable as a matter of law. The court held that the insurer’s communications “effectively disclaimed” coverage—notwithstanding boilerplate reservation of rights language—relieving the policyholder, Bear Stearns, of its obligation to obtain the insurer’s prior consent to a reasonable settlement. Justice Ramos recognized that “[a]n insurer declines coverage at its own risk.”