Recent Decision on D&O Coverage Allows Coverage for "Disgorgement" in Some Cases

A recent decision by New York's highest court, J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al., provides good news for D&O insureds on several points.  The case arises from Bear Stearns' $250 million settlement with the SEC relating to its allowing certain favored hedge funds to "market time" its mutual funds, that is, to make in and out trades to secure higher profits, activities Bear Stearns purported to disallow.  The D&O carrier made two principal arguments against indemnifying the settlement costs.  First, the carrier argued that the violations were intentional, and insurance does not cover intentional wrongs.  The Court rejected this argument, holding that while the violations of securities laws were willful and intentional, there was no conclusive evidence that Bear Stearns intended to cause injury or harm.  Both intentional violation and intent to cause harm are necessary to preclude coverage.  Second, the carrier argued that $160 million of the settlement was for disgorgement, and disgorgement is not covered and/or excluded.  The Court held, however, that the disgorgement in this case was not for profits to Bear Stearns, but rather based on the profits of the hedge funds.  The Court held that there is no bar to coverage for disgorgement of profits to third parties -- rather than disgorgement of profits made by the insureds.  This decision may provide some additional arguments to obtain indemnification from D&O carriers in the context of SEC and other government settlements.