nystate1In the latest development in the long-running battle of J.P. Morgan Chase, as successor in interest to Bear Stearns, to try to obtain insurance coverage for amounts Bear Stearns paid to resolve an SEC investigation of alleged deceptive market timing and late trading activities, a New York state court judge has held that because its D&O insurers had “effectively disclaimed coverage,” Bear Stearns was excused from its policy obligation to obtain the insurers’ consent prior to its settlement with the SEC. However, the court declined to resolve the question of whether or not the settlements were “reasonable.” The now years-long insurance coverage battle will continue to go forward on the remaining issues. A copy of July 7, 2016 of New York (New York County) Supreme Court Charles E. Ramos can be found here.



In 2006, the SEC notified Bear Stearns that the agency was investigating late trading and market timing activities units of Bear Stearns had undertaken for the benefit of company clients. The agency advised the company that it intended to seek injunctive relief and monetary sanctions of $720 million.


Bear Stearns ultimately made an offer of settlement and –without admitting or denying the agency “findings” – consented to the SEC’s entry of an Administrative Order, in which, among other things, Bear Stearns agree to pay a total of $215 million, of which $160 million was labeled “disgorgement” and $90 million as a penalty.


At the relevant time, Bear maintained a program of insurance that, according to the subsequent complaint, totaled $200 million. Bear Stearns sought to have the carriers in the program indemnify the company for the $160 million amount in the settlement labeled as “disgorgement.” However, the insurers contended that because the $160 million payment was labeled “disgorgement” in the Administrative Order, it did not represent a covered loss under the insurance policies.


In 2009, J.P. Morgan (into which Bear Stearns merged in 2008) filed an action seeking a judicial declaration that the insurers were obliged to indemnify the company for the amount of the $160 million payment in excess of the $10 million self insured retention, as well as the approximately $14 million paid to settle the parallel securities class action lawsuit, and defense fees.


Many of the issues presented in the declaratory judgment have already been extensively litigated, and the case has already made its way to the New York Court of Appeals, New York’s highest court (as discussed in prior posts on this blog, here and here).


In the latest round of skirmishing in the case, Bear Stearns filed a motion for partial summary judgment seeking to dismiss the insurers’ defense based on the argument that the company had breached the insurance policy conditions requiring it to obtain the insurers’ consent prior to settling with the SEC, as well its duty to cooperate with the insurers.


In filing its motion, Bear Stearns argued under New York law that where as here the insurer had denied liability, the insured is free to enter into a reasonable settlement without obtaining the insurers’ consent. Bear Stearns argued that the insurers had denied coverage based on the arguments that the SEC investigation was not a “Claim” within the meaning of the policies and that the amounts paid to the SEC as “disgorgement” represented amounts uninsurable as a matter of law.


The company argued that because the insurers had denied coverage, they were relieved of their obligation under the policy to obtain the insurers consent to settlement. The insurers argued that they had not denied coverage but only reserved their rights to deny coverage, while asking for additional information that the company failed to provide in violation of the cooperation clause. They argued that the company was not excused from its obligation to obtain its consent prior to settlement with the SEC and was not excused from its duty to cooperate.


With respect to the consent to settlement issue, the primary policy provides in pertinent part that:


The Insured agrees not to settle any Claim, incur any Defense Costs or to otherwise assume any contractual obligation or admit any liability with respect to any Claim in excess of a settlement authority threshold of $5,000,000 without the Insurer’s consent, which shall not be unreasonably withheld. The Insured shall have the right to select its own legal defense counsel, subject to the approval of Insurers which shall not be unreasonably withheld.


With respect to cooperation, the primary policy specifies that


The Insured agrees to provide Insurers with all information, assistance and cooperation which the Insurer reasonably requests and agrees that in the event of a Claim, the Insured will do nothing that may prejudice the Insurer’s position or its potential or actual rights of recovery.


The primary policy defines the term Claim as:

(1) a civil proceeding commenced by the service of a complaint or similar pleading; (2) any investigation into possible violations of law or regulation initiated by any governmental body or self-regulatory organization (SRO), or any proceedings commenced by the filing of a notice of charges, or formal investigative order or similar document, or (3) a written demand against an Insured for any Wrongful Act, including any appeal therefrom.


The July 7 Order

In his July 7, 2016 order, Judge Ramos granted Bear Stearns  motion for partial summary judgment, holding that the company did not need to obtain the insurers’ consent prior to its settlement with the SEC, and holding that the company had not breached its duty to cooperate.


In reaching these decisions, Judge Ramos first concluded, contrary to the arguments of the insurers and the position that the insurers took in response to the company’s notice of claim, that the SEC investigation and the related NYSE investigation “were undeniably a ‘claim’ under the policy,” citing the policy provision defining claim as “Any investigation into possible violations of law or regulation initiated by any governmental body or self-regulatory organization.”


Judge Ramos noted that the insurers, in response to the initial notice of claim, had taken the position that even if there were a claim, the settlement amounts would be uninsurable because the amounts the company paid as “disgorgement” were categorically uninsurable. (As discussed here, the parties have previously litigated the disgorgement issue, with the New York Court of Appeals holding that because the amounts paid to the SEC represented a return of customers’ profits and not of the company’s own profits, it did not represent a disgorgement for which coverage is prohibited).


Judge Ramos said that because the insurers had “effectively disclaimed coverage,” Bear Stearns was “excused …from complying with the terms of the policies obligating it to obtain the Insurers’ consent before settlement of any matter” and was entitled to enter into a reasonable settlement based on the terms of the policies themselves.”


In reaching this conclusion, Judge Ramos rejected the insurers’ position that they had never conclusively denied coverage but had only reserved their rights to deny coverage and had advised Bear Stearns that their determination was non-final. Judge Ramos said that while the insurers’ letters contained “boilerplate ‘reservation of rights’ language, the Insurers’ other statements left no doubt that they were disclaiming coverage” on the grounds that there had been no claim within the meaning of the policy , and that even if there was claim, it was uninsurable as a matter of law.


However, Judge Ramos said because the inquiry was inherently fact-specific, he was unable to rule on the issue of whether or not the settlements entered were reasonable, reserving that issue for trial.


Finally, Judge Ramos granted Bear Stearns motion for partial summary judgment on the cooperation issue, stating that the insurers’ own expert had stated that the company had offered the Insurers access to all of the evidentiary documents (to be sure, while also stating that the Insurers were entitled to receive “more meaningful information”). Judge Ramos said that “it is not at all clear what additional meaningful information Bear Stearns could have provided,” adding that there is no evidence that Bear Stearns obstructed the insurers’ efforts to obtain cooperation. He concluded that “there is no doubt that the Insurers’ have failed to meet their heavy burden that they diligently sought Bear Stearns’ cooperation, or that Bear Stearns willfully obstructed these efforts.”


This long-running battle has ground on for years. The underlying conduct that was the subject of the SEC investigation allegedly took place during the period 1999 to 2003. Bear Stearns entered the settlement with the SEC in 2006. The coverage litigation began in 2009. The procedural history of the coverage action, which includes at least one trip already to the New York’s highest court, is long and complicated. Even with this latest set of rulings, the case is far from complete, as the case must now go forward on a number of issues, including the question of whether or not the settlement was reasonable.


The insurers undoubtedly are disappointed (and perhaps surprised) by Judge Ramos’s rulings here, for a number of reasons. It is noteworthy that Judge Ramos appeared to accept, without hesitation, that the SEC investigation here constituted a claim. This may be in part due to the specific provisions of the primary policy at issue, and in particular its distinct definition of the term “Claim.” Unlike many similar policies, this policy did not qualify its inclusion of “investigation” into the definition of claim by a proviso requiring that in order for an investigation to meet the definition of “Claim,” the investigation must have been “formal.”


Were the language in this policy qualified in that way, there may have been more of a question for Judge Ramos about whether or not the investigation is a “Claim” within the meaning of the policy. While the policy definition, in a separate subordinate clause does refer to a “formal investigative order or similar document,” that provision does not modify the prior wording including within the definition of “Claim” as any “investigation into possible violations of law or regulation initiated by any governmental body or self-regulatory organization.”


Judge Ramos also had little trouble concluding that the carrier had denied coverage, rather than reserving its right, and that the denial excused the company from its obligation to obtain consent to settlement. Based on my reading of the parties’ brief, Judge Ramos’s conclusion that the parties had denied coverage may have been a particularly unwelcome and surprising part of the court’s decision.


There may be some lessons here, in both parts of this analysis. Insurers should read closely the part of Judge Ramos’s opinion where he characterized the insurers’ efforts to reserve their rights as mere “boilerplate” that did not alter the fact that the insurer was “effectively denying coverage.” Many insurers take positions or actions in other claims based on the presumption that they have merely reserved rights rather than denied coverage. The fact that an insurer might be found to have “effectively denied coverage” while attempting only to reserve rights may represent a precautionary warning for carriers, and suggest that they take care to position themselves even when merely reserving rights rather than, as they may believe, actually denying coverage.


From my perspective on the consent to settlement issue, there may be a further lesson, this time for the policyholders. I should hasten to add here that I am not entirely versed in the factual record in this case, and I am not entirely sure what communications may have taken place prior to Bear Stearns’ entry into the SEC settlement. However, one lesson from this case may be that there are steps parties should take in advance of entry into a settlement that might, even when coverage is otherwise disputed, avoid the consent to settlement issue. That is, to avoid a later dispute, the policyholder can approach the insurer and try to obtain its agreement that, notwithstanding any other coverage issues that may be in dispute, the insurer will not raise the settlement consent issue as an additional defense to coverage. Again, because I don’t what sorts of communications actually did take place here, I can’t say for sure whether or not this type of agreement was even possible here. But it may be that in other cases, this type of agreement can be reached, which would at least ensure that the consent to settlement issue will not be added to whatever coverage issues may already be involved.


In the end, this case will go on. In light of the prior procedural history in this case, there could well be an appeal of Judge Ramos’s latest ruling, while the substantive motions on other issues proceed in the trial court. The case eventually may head to trial in what would be a very high profile and interesting proceeding.


Special thanks to a loyal reader for providing me with a copy of the Judge Ramos’s opinion.