(Article from Insurance Law Alert, September 2018)
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The Delaware Supreme Court ruled that class action settlement payments were not uninsurable disgorgement under New York law. In re: TIAA-CREF Ins. Appeals, 2018 WL 3620873 (Del. July 30, 2018).
TIAA-CREF, a company that provides counseling for retirement accounts, pensions and other investments, was named as a defendant in three class action suits that alleged failure to pay financial gains that had accrued in customers’ 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 were uninsurable disgorgement under New York law. A Delaware state court disagreed. See November 2016 Alert. The Delaware Supreme Court affirmed the ruling.
The Delaware Supreme Court noted that New York public policy prohibits insurance coverage for disgorgement where “payment is conclusively linked, in some fashion, to improperly acquired funds in the hands of the insured.” However, the court concluded that no such showing of ill-gotten gains was made here. The court distinguished New York cases finding disgorgement uninsurable, explaining that those cases involved conclusive links between the insured’s misconduct and the payment of funds, whereas here, TIAA-CREF expressly denied any liability. Additionally, the court noted that the New York cases finding disgorgement uninsurable involved claims brought by government or regulatory entities, whereas the claims against TIAA-CREF were brought in private civil actions.
In a case involving payments to the Securities and Exchange Commission (“SEC”), a New York appellate court recently ruled that a policyholder was not entitled to coverage for a portion of a payment that expressly represented disgorgement. J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., 2018 WL 4494692 (N.Y. App. Div. 1st Dep’t Sept. 20, 2018).
The insurance dispute arose out of a settlement between the SEC and Bear Stearns & Co. Under the settlement, Bear Stearns agreed to pay $160 million as “disgorgement” and $90 million as a civil penalty in connection with deceptive trading claims. When Bear Stearns sought indemnification for the disgorgement portion of the settlement, its insurers denied coverage.
A New York trial court ruled that the disgorgement payment was a covered “loss” under the policy because it represented third-party gains. This month, the appellate court reversed.
The appellate court ruled that the disgorgement payment was not a covered “loss,” defined by the operative liability policy to exclude “fines or penalties imposed by law.” The appellate court ruled that the insurers were entitled summary judgment because the disgorgement payment constituted an excluded penalty. The court relied on the United States Supreme Court’s ruling in Kokesh v. S.E.C., 137 S. Ct. 1635 (2017), which expressly held that “SEC disgorgement constitutes a penalty.” Although Kokesh was decided in the context of a statute of limitations dispute, the New York appellate court held that “[t]he Supreme Court’s rationale as to the nature of disgorgement . . . applies with equal force to the issue of whether the disgorgement paid by Bear Stearns, even if representing third party gains, was a ‘Loss’ within the meaning of the policy.”