Insurance Claim; Motion for Summary Judgment; Indemnity; Consent-to-Settle; Regulatory Investigation; Duty to Cooperate; Breach of Contract; Disgorgement.
By Janel Rottkamp | Staff Writer
Defendant provided Plaintiff with professional liability coverage, governed by a policy that required Defendant to pay Plaintiff for losses resulting from any claim for any “Wrongful Act.” Subsequently, Plaintiff was subject to investigations by the Securities and Exchange Commission (“SEC”), the New York Stock Exchange (“NYSE”), and other regulatory authorities for allegedly facilitating its customers’ late trading, and for deceptive market timing connected to the buying and selling of shares in mutual funds, which decreased the shareholders’ value in those affected funds.
Based on the findings of these investigations, the SEC commenced a civil enforcement action against Plaintiff seeking broad injunctive relief and monetary sanctions. Plaintiff asserted that it did not receive any profits, nor any other financial benefits for permitting these trading practices. Despite this, Plaintiff made a settlement offer, and without admitting or denying the findings of the SEC’s investigation, consented to the entry of its findings. Additionally, Plaintiff settled thirteen civil class actions commenced on behalf of mutual fund investors allegedly damaged by Plaintiff’s conduct. A portion of Plaintiff’s settlement payments were labeled as “disgorgement.” Following these settlements, Defendant refused to indemnify Plaintiff for the losses that it incurred, contending that the disgorgement payments do not constitute “loss” under the policy, and are thus categorically uninsurable.
Plaintiff sued Defendant alleging breach of contract on the basis that settlements including disgorgement payments do not preclude Plaintiff from insurance coverage. Plaintiff also sought a declaration that Defendant is required to indemnify Plaintiff for claims stemming from Plaintiff’s settlement of the SEC and the NYSE regulatory proceedings, including the thirteen civil class actions. The Court denied Defendant’s motion to dismiss. Defendant then appealed, which resulted in a reversal of the lower court’s judgment.
Defendant made a cross motion for an order granting summary judgment on the following bases: (1) Plaintiff breached the insurance policy conditions requiring it to obtain Defendant’s consent to settle; (2) Plaintiff breached its duty to cooperate by failing to provide Defendant with reasonably requested information about the settlement of the SEC’s charges and investigation; and (3) if Plaintiff is found to be unexcused from such obligations, Defendant’s refusal to consent to the settlement was reasonable.
In opposition, Plaintiff moved for an order granting partial summary judgment, arguing the following: (1) Defendant was permitted to enter into the settlement without Plaintiff; (2) Plaintiff duly reported the regulatory investigation demands to Defendant, and that Defendant rejected the notice; and (3) the regulatory proceedings fit the policy’s definition of “any investigation into possible violations of law or regulation initiated” and thus plainly constituted a “claim,” despite the disgorgement payment
The Court partially granted Plaintiff’s motion and denied Defendant’s cross motion. First, regarding obtaining consent to settle, the Court reasoned that Defendant’s clearly-established repudiation of liability excused Plaintiff from its duty to obtain consent before settling. In New York, an insured is permitted to enter a reasonable settlement without the insurer’s consent. Here, Defendant disclaimed coverage prior to Plaintiffs’ settlement with the SEC by asserting, from the inception of the regulatory investigations, that the investigations did not seem to constitute a claim. Thus, Plaintiff was entitled to enter a reasonable settlement without obtaining Defendant’s consent. However, the Court noted that without further fact-finding, it could not determine whether the settlements were reasonable.
Second, regarding Defendant’s argument that Plaintiff breached its duty to cooperate, the Court held that the Defendant failed to meet its heavy burden of proving Plaintiff breached its duty. To breach a duty to cooperate, an insurer must act diligently to incite cooperation and the insured’s attitude must then be one of “willful and avowed obstruction.” Here, Defendant did not cite any affirmative acts or omissions in performance by Plaintiff in seeking to prove Plaintiff’s non-cooperation. Further, the Court reasoned that while Defendant was entitled to receive more meaningful information, Defendant’s own expert admitted that Plaintiff offered it access to evidentiary documents produced to the SEC, which is inconsistent with a lack of cooperation. Thus, the Court denied Defendant’s motion as to this point.
Finally, the Court held that the SEC and NYSE’s regulatory investigations undeniably constituted a “claim” under the policy. The Court reasoned that the policy defined “claim” as “any investigation into possible violations of law or regulation initiated by any governmental body or self-regulatory organization.” Here, the SEC and NYSE’s demands for information furthered investigations into Plaintiff’s alleged facilitation of customers’ late trading, and deceptive market timing, and thus plainly amounted to a “claim” under the policy, despite Plaintiff’s disgorgement payment. Therefore, Plaintiff was not precluded from coverage.
Therefore, the Court granted Plaintiff’s motion for an order granting partial summary judgment in part, holding that Plaintiff had not breached its duty to cooperate, but denied Plaintiff’s motion regarding the reasonability of the settlement terms, pending further fact-finding. The Court denied Defendant’s cross motion.
J.P. Morgan Securities Inc., et al. v. Vigilant Insurance Company, et al., Index No. 26226/2016, 07/07/2016 (Ramos, J.)