New York Court of Appeals

Ever since the Seventh Circuit’s 2001 decision in Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908 (7th Cir. 2001), insurance companies have argued that settlements constituting restitution or disgorgement are uninsurable on grounds of public policy. While numerous decisions since 2001 have undercut this defense, two recent decisions out of the New York Court of Appeals and the Northern District of Illinois further confirm that coverage does not depend on how the damages paid are characterized. In both J.P. Morgan Securities Inc. v. Vigilant Insurance Co., No. 61, 2021 N.Y. slip op. 06528 (N.Y. Nov. 23, 2021), and Astellas v. Starr Indemnity, No. 17-cv-8220 (N.D. Ill. Oct. 8, 2021), the courts looked beyond the labels of “restitution” and “disgorgement” affixed to the insureds’ settlement payments to determine whether such payments were covered by each insureds’ respective insurance policies.

Last week’s post on The Policyholder Perspective took an in-depth look at Vigilant Insurance Co.  This week we consider how Vigilant, in tandem with Astellas, demonstrates a trend in how courts interpret labels on payments in an insured’s settlement agreement.

In Astellas, the insured (Astellas) entered a settlement agreement relating to a False Claims Act investigation and agreed to pay $100 million plus interest to the United States, with $50 million of such settlement labeled as “restitution to the United States.” In a similar vein, the insured (Bear Sterns) in Vigilant Insurance Co. entered a settlement agreement with the SEC for alleged illegal trading practices and made a $160 million “disgorgement” payment – $140 million of which was an estimate of the profits gained by Bear Sterns’ clients – and a $90 million payment for “civil money penalties.” Astellas submitted a claim to its insurers for the $50 million “restitution to the United States,” and Bear Sterns submitted a claim for the $140 million “disgorgement” payment reflecting its clients’ profits gained.Continue Reading Labels, Shmabels: Recent Decisions Confirm No “Restitution / Disgorgement” Exclusion in Management Liability Policies

Putting an end to a 12-year-old dispute between J.P. Morgan Securities’ predecessor, Bear Stearns & Co., and several of its insurers, on November 23, 2021, New York’s high court held that J.P. Morgan’s $140 million payment to the Securities and Exchange Commission (SEC) did not constitute an uninsurable “penalty” under J.P. Morgan’s excess directors & officers (D&O) liability policies. This is welcome news for policyholders faced with coverage denials from their insurers based on “public policy,” “fines or penalty,” “disgorgement” or other grounds of alleged uninsurability.

In J.P. Morgan, J.P. Morgan’s $140 million “disgorgement” payment was part of a larger $250 million settlement between J.P. Morgan and the SEC. $90 million of the settlement was specifically allocated to “civil money penalties.” The settlement resolved allegations that Bear Stearns & Co. and other securities broker-dealers facilitated late trading and deceptive market timing practices by their customers in connection with the purchase and sale of mutual funds.

J.P. Morgan’s excess policies covered “loss” that the insured entities became liable to pay as the result of any civil proceeding or governmental investigation alleging wrongful acts constituting violations of laws or regulations. The policies defined “loss” to include various types of compensatory and punitive damages where “insurable by law,” but specifically excluded matters uninsurable as a matter of public policy and “fines or penalties imposed by law.” The insurers argued that the disgorgement payment was uninsurable as a matter of New York law both as form of restitution of ill-gotten gains and as a penalty imposed by law.Continue Reading End to long-running dispute over uninsurability under D&O insurance

The New York Court of Appeals, the state’s highest court, recently rejected an attempt to apply the “common interest doctrine,” an exception to the general rule that communicating privileged information to a third party waives the attorney-client privilege, to situations where separately represented parties communicate attorney-client privileged information in connection with transactions or other circumstances other than in anticipation of litigation. Ambac Assur. Corp. v. Countrywide Home Loans, Inc., No. 80, 2016 WL 3188989 (N.Y. June 9, 2016). As this case shows, companies should be mindful of what information they share outside the litigation context, because the common interest doctrine may not be available to protect that information.
Continue Reading ‘Sorry, But You Have Nothing in Common’: The New York Court of Appeals’ Recent Rejection of the ‘Common Interest Doctrine’ Outside the Context of Litigation