57 Misc. 3d 171
N.Y. Sup. Ct.2017Background
- Bear Stearns subsidiaries (broker-dealer and clearing firm) were investigated by the SEC and NYSE for facilitating late trading and deceptive market timing; Bear Stearns settled the SEC matter for $250 million ( $160M disgorgement, $90M penalty) and settled related class actions for $14 million.
- Bear Stearns seeks insurance indemnity under a professional liability program providing $200M excess coverage above a $10M retention; insurers disclaimed coverage treating disgorgement as uninsurable ill-gotten gains and asserting policy exclusions.
- Plaintiffs produced evidence (counsel testimony, SEC subpoena responses, accounting analyses) showing SEC staff accepted a "fair value" methodology that attributed $140M of the disgorgement to customer gains (not Bear Stearns’ profits).
- Insurers invoked multiple defenses: disgorgement is uninsurable ill-gotten gain; personal-profit/public-policy exclusions; a capacity/third-party-liability exclusion; prior-known-wrongful-acts exclusion in Lloyd’s/AAIC excess layers; and that settlements were unreasonable.
- The court previously resolved related procedural and coverage questions (including prior appellate history) and had ruled insurers effectively disclaimed pre-settlement, excusing any consent-to-settle requirement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the $140M portion of SEC "disgorgement" is insurable (i.e., customer gains vs. insured's ill-gotten gains) | Evidence shows SEC accepted Bear Stearns' fair-value customer-gain calc attributing $140M to customers; policy definition of "Loss" is broad and covers such payments | SEC order does not explicitly allocate disgorgement; disgorgement labeled so is uninsurable as return of ill-gotten gains | Held for plaintiff: Sufficient competent evidence that $140M represents customer gains; insurers failed to raise triable issue that disgorgement was Bear Stearns’ ill-gotten gain |
| Applicability of personal-profit / public-policy exclusions | Exclusion applies only to profit the insured actually (in fact) gained unlawfully; here the disgorgement largely reflects third-party gains and Bear Stearns lawfully earned clearing fees | Insurers say any profit/advantage to insured (including derivative benefits) triggers exclusion; also argue intentional misconduct bars coverage on public-policy grounds | Held for plaintiff: exclusion construed narrowly; does not bar coverage for the $140M; no evidence Bear Stearns acted with intent to harm required to invoke public-policy exception |
| Reasonableness of settlements (defense that settlements were unreasonable) | Settlements were reasonable given potential exposure (SEC’s initial demand up to $720M / $520M disgorgement by Delta NAV), extensive negotiations, and settlement history; plaintiffs produced non-privileged support | Insurers argue plaintiffs withheld privileged assessment evidence and settlements were excessive | Held for plaintiff: Insurers failed to show settlements unreasonable; reasonableness satisfied on facts known to insured at time |
| Prior-known-wrongful-acts exclusion in Lloyd’s/AAIC excess policies (did officers know pre-coverage?) | Undefined term "officer" should be narrowly construed to executive/managerial officers; no competent evidence senior officers knew of wrongful acts before coverage date or could foresee claims | Underwriters urge broad definition of "officer" (many titled employees) and point to SEC factual recitations and employee testimony to trigger exclusion | Held for plaintiff: ambiguity in "officer" resolved against insurers; Underwriters failed to meet heavy burden to show officers had knowledge or objectively foreseeable claim pre-policy date; exclusion does not bar coverage |
Key Cases Cited
- Pioneer Tower Owners Assn. v. State Farm Fire & Casualty Co., 12 N.Y.3d 302 (N.Y. 2009) (exclusions must be clear and are strictly construed)
- J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 21 N.Y.3d 324 (N.Y. 2013) (return of improperly acquired funds may not be "loss"; SEC order language alone may not conclusively establish insurer defenses)
- Luria Bros. & Co. v. Alliance Assurance Co., Ltd., 780 F.2d 1082 (2d Cir.) (insured may settle after insurer declines; settlement recovery requires potential liability and reasonable settlement amount)
- Executive Risk Indemnity, Inc. v. Pepper Hamilton LLP, 13 N.Y.3d 313 (N.Y. 2009) (standard for prior-knowledge exclusions; mixed subjective/objective test)
- Liberty Ins. Underwriters Inc. v. Corpina Piergrossi Overzat & Klar LLP, 78 A.D.3d 602 (App. Div. 2010) (application of prior-knowledge exclusion and test for foreseeability of claims)
- Millennium Partners, L.P. v. Select Insurance Co., 68 A.D.3d 420 (App. Div. 2009) (disgorgement tied to improperly acquired funds is not insurable)