New York Court of Appeals: J. P. Morgan Chase Sec., Inc. v. Vigilant Ins. Co.

In this appeal, the Court of Appeals addressed the circumstances required to dismiss an insurance claim as violating public policy because it seeks coverage for conduct done with the intent to harm. The controversy arose from a 2003 Securities and Exchange Commission (“SEC”) investigation of Bear Stearns & Co., Inc. (“Bear Stearns”), which subsequently merged with J.P. Morgan Chase, now party to this case. The investigation focused on Bear Stearns’s alleged late trading, a practice characterized by placing trades after the markets have closed for the day. As a result of the SEC’s findings, Bear Stearns settled by agreeing to pay $250 million into a victim compensation fund for those mutual fund investors harmed. Although “[neither] admitting [nor] denying the findings,” Bear Stearns also agreed that it would not seek indemnification for the $90 million civil penalty portion of the settlement. 21 N.Y.3d at 330. The settlement contained no such restriction concerning the remaining $160 million, characterized by the SEC as a disgorgement payment.

When Bear Stearns sought indemnification, the defendant insurers denied all its claims in connection with the SEC investigation and lawsuit. These included claims for the $160 million disgorgement, $40 million in legal fees, and $14 million from a private settlement. Although the relevant insurance policy provided for excluding coverage of losses arising from “deliberate, dishonest, fraudulent, or criminal” acts, the exclusion only applied unless and until a final judgment declaring such conduct to be true. Id. at 332. As a result, Bear Stearns sued the insurers.

The defendant insurers moved to dismiss the complaint, arguing that indemnifying Bear Stearns for any portion of the SEC settlement violated public policy. In response, Bear Stearns alleged that it was not unjustly enriched to the extent that profits arising from its conduct went straight to its customers. Acknowledging that prior case law has barred an insured from seeking coverage of conduct done with the intent to harm, the Court held that the SEC’s findings failed to clearly establish Bear Stearns’s intent to cause harm, even though they clearly established intent to break the law. In doing so, the Court distinguished cases that barred an insured from indemnification of SEC-ordered disgorgement where the SEC’s findings “‘conclusively link[ed]’ the disgorgement payment to improperly acquired funds in the hands of the insured.” Id. at 337 (quoting Millennium Partners, L.P. v. Select Ins. Co., 68 A.D.3d 420, 420 (N.Y. App. Div. 2009) (internal quotation marks omitted)).

The Court was careful to disclaim any support of questionable trading practices. Instead, it emphasized that the defendant insurers’ burden of proof in showing a clear intent to cause harm was particularly high at such a preliminary stage in the proceedings. Based on its finding of no conclusive showing of intent to harm, the Court reversed the Appellate Division’s dismissal and reinstated Bear Stearns’s claims.

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21 N.Y.3d 324, 992 N.E.2d 1076, 970 N.Y.S.2d 733 (2013)

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