Delaware Court Rules That Settlement Payments Are Not Uninsurable Disgorgement
11.29.16
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(Article from Insurance Law Alert, November 2016)
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A Delaware trial court ruled that class action settlement payments do not constitute uninsurable disgorgement under New York law. TIAA-CREF Individual & Institutional Svs., LLC v. Illinois Nat’l Ins. Co., 2016 WL 6534271 (Del. Superior Ct. Oct. 20, 2016).
TIAA-CREF was sued in three class action suits that alleged failure to pay customers gains that had accrued in their accounts. TIAA-CREF settled the actions and sought reimbursement of defense costs and settlement payments from its liability and excess insurers. The insurers denied coverage and argued, among other things, that the settlement payments are uninsurable disgorgement under New York law. The court disagreed and granted in part TIAA-CREF’s summary judgment motion.
The court ruled that there is “no conclusive link between the settlements in the Underlying actions and wrongdoing by TIAA-CREF that would render the settlement agreements uninsurable disgorgement.” Although several New York decisions have upheld coverage denials based on the public policy against insuring disgorgement, the court distinguished those rulings and the court stated that those cases “involve conclusive links between the insured’s misconduct and the payment of monies,” whereas here, TIAA-CREF expressly denied any liability. The court further noted that those cases involved underlying actions brought by the SEC or other governmental entities and distinguished a settlement from “an order to return funds.” See, e.g., J.P. Morgan Securities Inc. v. Vigilant Ins. Co., 2013 WL 2475864 (N.Y. June 11, 2013) (discussed in our June 2013 Alert).
The court also addressed several other coverage issues. First, it ruled that St. Paul’s policies cover the two class action suits that were filed after the expiration of its policy period because the claims in those suits “related back” to a class action filed during St. Paul’s policy period. Second, the court held that coverage is not barred by the policies’ commingling exclusions because the record did not indicate that TIAA-CREF had mixed client accounts with its own funds or had used client funds for its own private benefit. Third, the court ruled that an issue of fact exists as to whether TIAA-CREF forfeited coverage by breaching a consent to settlement provision. The court noted that while coverage denials under certain policies might affect the insurers’ right to enforce the consent to settlement provisions, a question of fact remains as to whether the insurers retained the right to withhold consent with respect to other policies. Finally, the court concluded that the reasonableness of defense costs presents issues of fact, rejecting the argument that the costs should be deemed per se reasonable because of TIAA-CREF’s incentive to minimize expenses based on the uncertainty about reimbursement.