On January 15, 2015, the First Department issued a decision in J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 2015 NY Slip Op. 00462, holding that an SEC administrative order, arising from an investigation of improper “market timing” by Bear Stearns, did not constitute an “adjudication” of wrongdoing sufficient to trigger a Dishonest Acts Exclusion in Bear Stearns’ professional liability policy, but could be the basis for an affirmative defense based on the public policy against permitting insurance coverage for disgorgement.
In affirming the decision of New York County Commercial Division Justice Charles Ramos on the application of the exclusion (which we previously blogged about here, the First Department explained:
To negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. Further, the court is required to interpret the policy in light of common speech and the reasonable expectations of a businessperson. Here, the issue is the applicability of the Dishonest Acts Exclusion, so defendants bear the specific burden of demonstrating that a settlement constitutes an “adjudication” for purposes of the exclusion.
In arguing that the term “adjudication” means any resolution of a dispute that has specific consequences for a party, defendants virtually ignore the part of the Dishonest Acts Exclusion that requires that any adjudication “establish that such Insured(s) were guilty of any deliberate, dishonest, fraudulent or criminal act or omission” (emphasis added). Defendants quote the dictionary definition of “adjudication,” but fail to note that “establish” is defined, in this context, as “to put beyond doubt”. It can hardly be said that the SEC Order and the NYSE Stipulation put Bear Stearns’s guilt “beyond doubt,” when those very same documents expressly provided that Bear Stearns did not admit guilt, and reserved the right to profess its innocence in unrelated proceedings. Again, in interpreting the policy we are guided by reason, and defendants’ position that the settlement documents “establish” guilt is not reasonable.
The First Department reversed Justice Ramos’ dismissal of the insurance carriers’ affirmative defense based on the public policy against permitting insurance coverage for disgorgement of ill-gotten gains. The court explained that although the wording of the policy prevented the insurance companies from relying on the SEC’s “findings” in the administrator orders to avoid coverage based on the exclusion, the “language of a policy may be overwritten is where an insured engages in conduct ‘with the intent to cause injury,'” as it would violate public policy to permit insurance coverage in that context regardless of what the policy says.