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New York high court backs JP Morgan against insurers in decades-old Bear Stearns claim

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New York State’s highest court sided with JP Morgan in a case deciding whether insurance policies purchased more than a decade ago by former investment bank Bear Stearns applied in a 2003 Securities and Exchange Commission (SEC) probe.

Bear Stearns, the once-revered Wall Street stalwart that JP Morgan purchased for $2 per share in March 2008, reached a settlement with the SEC in the case, which involved late trading and deceptive market timing activities for certain clients.

The settlement required Bear Stearns to disgorge $160mn, along with a $90mn penalty, to compensate mutual fund investors who were harmed by its improper trading practices.

The decision reversed a lower court’s ruling that the insurers, including Chubb subsidiary Vigilant Insurance, Lloyd’s syndicates and Travelers, were not required to cover the payouts because the $160mn disgorgement was not insurable as a matter of public policy.

Chief Judge Janet DiFiore of the New York Court of Appeals wrote in the decision that the dispute turned on the proper interpretation of various parts of the coverage provision, particularly the definition of “loss.”

“Under the relevant policies, the insurers agreed to pay all ‘loss’ which Bear Stearns became legally obligated to pay as the result of any claim – defined as including any civil proceeding or governmental investigation – for any wrongful act, which encompassed any actual or alleged act, error, omission, misstatement, neglect or breach of duty by Bear Stearns and its employees,” DiFiore wrote.

The policies defined “loss” to include compensatory damages, punitive damages where insurable by law, multiplied damages, judgments, settlements, and costs and expenses resulting from any claim. She noted that “loss” expressly encompassed “costs, charges and expenses or other damages incurred in connection with any investigation by any governmental body”.

However, there was an exception in that “loss” should not include “fines or penalties imposed by law”.

“This language is at the core of this appeal,” DiFiore wrote. She cited case law that held that “the specific language used in the relevant policies ‘must be interpreted according to common speech and consistent with the reasonable expectation of the average insured’ at the time of contracting, with any ambiguities construed against the insurer and in favor of the insured”.

She also said that the insurer “bears the burden of proving that an exclusion applies to defeat coverage”.

The insurers did not meet the burden of proving that the phrase in the policy that excluded “penalties imposed by law” would not apply to disgorgement, DiFiore wrote, because the phrase wasn’t defined in the polices.

She stated that prior cases determined that a penalty is distinct from a compensatory remedy, and under New York State law, penalties have “consistently been distinguished from compensatory remedies, damages and payments otherwise measured through the harm caused by wrongdoing.”

Both sides agreed the $90mn Bear Stearns paid was clearly a penalty. Bear Stearns demonstrated that $140mn of the $160mn disgorgement reflected the value of customers’ gains and corresponding injury, while $20mn was Bear Stearns’ own ill-gotten gains.

The removal of the $20mn from the coverage request supported the investment bank’s claims, the chief judge wrote, noting that “the policies expressly covered settlements and other sums related to investigations by a governmental regulator”.

The case was sent back to the Appellate Court for review of additional issues in the case that were not considered when it dismissed the broader case.

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