MBIA Inc. v. Federal Insurance
2011 U.S. App. LEXIS 13402
| 2d Cir. | 2011Background
- MBIA purchased two $15 million D&O insurance policies from Federal and ACE covering Securities Claims and related Costs.
- Regulators (SEC and NYAG) investigated MBIA in 2004–2007 for alleged accounting and reporting misstatements tied to three MBIA transactions.
- The three scrutinized transactions were AHERF, Capital Asset, and U.S. Airways-related guarantees and restructurings.
- MBIA sought coverage for regulators' investigations, the independent consultant's review, and derivative-litigation-related costs under the policies.
- The district court granted MBIA summary judgment on some costs but ruled against coverage for the independent consultant costs, prompting appeals.
- The Second Circuit held MBIA covered for investigation costs (NYAG AHERF; SEC and NYAG Capital Asset/U.S. Airways), covered SLC costs, and remanded for judgment in MBIA’s favor on IC costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are NYAG's AHERF and SEC/NYAG Capital Asset and U.S. Airways investigations 'Securities Claims'? | MBIA: investigations are 'Securities Claims' under the policy definitions. | Insurers: investigations fall outside defined 'Securities Claims' and thus are not covered. | Yes; investigations commenced by formal/informal orders are Securities Claims. |
| Are derivative-litigation costs for the Special Litigation Committee covered despite the $200,000 sublimit? | MBIA: SLC costs fall within Insuring Clauses 2/3; sublimit cannot exclude coverage for SLC actions. | Insurers: SLC costs either limited by sublimit or excluded as costs of derivative actions. | Covered; the sublimit does not bar coverage for SLC costs under the policy structure. |
| Are the independent consultant (IC) costs within policy coverage despite association/consent provisions? | MBIA: IC costs are covered as part of settlement-related investigation costs; insurers waived consent defenses by silence/inaction. | Insurers: IC costs were not contemplated as covered and consent waivers did not extend to IC. | Yes; IC costs are covered; MBIA fulfilled association/notice duties and consent defenses waived by insurer conduct. |
| Did the AOD (assurance of discontinuance) preclude reimbursement for IC-related costs? | MBIA: AOD does not preclude IC costs; IC expenses are separate from amounts due under AOD. | Insurers: AOD restricts MBIA’s ability to seek reimbursement for IC costs. | AOD does not preclude coverage of IC costs. |
Key Cases Cited
- Morgan Stanley v. Grp., Inc., 225 F.3d 270 (2d Cir. 2000) (interpretation of insurance policy terms and burden of proof)
- Continental Ins. Co. v. Atl. Cas. Ins. Co., 603 F.3d 169 (2d Cir. 2010) (contract interpretation and plain meaning controls)
- RNR Enters., Inc. v. SEC, 122 F.3d 93 (2d Cir. 1997) (scope of formal orders; relevance of SEC subpoenas)
- Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135 (2d Cir. 2008) (consent to settlement; notice sufficient under association clause)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (independence and authority of boards in derivative actions)
- Outboard Marine Corp. v. Liberty Mut. Ins. Co., 536 F.2d 730 (7th Cir. 1976) (concept of insurer's right to associate and settlement dynamics)