In a February 28, 2014 Commercial Division decision by Justice Ramos, the court granted the plaintiffs’ motion for partial summary judgment and denied the defendants’ motion for partial summary judgment.
The plaintiffs commenced this insurance coverage action seeking a declaratory judgment that its insurers, the defendants, were required to indemnify them against certain claims. The plaintiffs had previously achieved a monetary settlement of the claims, which were brought against Bear Stearns in administrative proceedings by the SEC and NYSE, and in related private ligation. The claims arose from allegations that Bear Stearns facilitated its customers’ practices of deceptive market timing and late trading.
During the course of the SEC’s initial investigation into the allegations, it informed Bear Stearns that intended to commence a civil proceeding for violations of federal securities laws in which the SEC would seek injunctive relief and sanctions of $720 million. After disputing the charges, Bear Stearns reached similar settlements with the SEC and NYSE that led administrative orders being issued by both the SEC and NYSE, which detailed the findings against Bear Stearns and labeled Bear Stearns’s payment of $160 million as “disgorgement” and its payment of an additional $90 million as a civil penalty. Bear Stearns also agreed to pay $14 million to settle the 13 related civil class action suits that had been filed against it.
After settling the claims, Bear Stearns sought coverage from the defendants under its professional liability policies, which provided Bear Stearns with $200 million in coverage, above a $10 million retention. Plaintiffs commenced this action after the defendants disclaimed on coverage on two grounds: (1) that the loss included disgorgement payments that are not insurable as a matter of law; and (2) that Bearn Stearns did not provide sufficient notice of the claim during the specified reporting period.
The plaintiffs’ instant motion sought to dismiss the defendants’ affirmative defenses which were based on claims that: (1) the plaintiffs’ insurance-based claims were excluded by their policies’ Dishonest Acts Exclusion; and (2) that permitting the indemnity claim would violate public policy, which precludes coverage for intentional harmful conduct. The defendants simultaneously moved for partial summary judgment on the Dishonest Acts Exclusion. The Dishonest Acts Exclusion barred coverage for claims arising out of “any ‘deliberate, dishonest, fraudulent or criminal act or omission,’ but only if a ‘judgment or other final adjudication thereof’ in the underlying case establishe[d] that the insured was ‘guilty’ of the excluded conduct.”
Noting that exclusionary provisions are “generally accorded a strict and narrow construction,” the court explained that the settlements arising from the administrative orders issued by the SEC and the NYSE were “not final adjudications or judgments establishing Bearn Stearns’ guilt in the underlying proceedings that it engaged in the wrongful conduct covered by the Dishonest Acts Exclusion.” The court further explained that Bear Stearns neither admitted or denied the factual findings in the administrative orders – except with respect to the SEC’s jurisdiction and the subject matter of the proceedings – and that administrative orders’ factual findings were “not the subject of hearings or rulings on the merits by a trier of fact.” Therefore, the court concluded, “[t]o infer, as the Insurers urge, that the term ‘final adjudication’ encompasses settlement of an administrative order, is to expand its reasonable interpretation beyond what is permitted under New York law.”
Based on these findings, the court also rejected the Insurers affirmative defense that the findings in the administrative orders conclusively established that Bear Stearns “acted with intent to injure mutual fund investors for which coverage is barred under New York public policy.”
J.P. Morgan Securities Inc., v Vigilant Insurance Company et al, Sup Ct, New York County, February 28, 2014, Ramos, J., index No. 600979/2009 .