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(Article from Insurance Law Alert, July/August 2016)

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A New York trial court ruled that Bear Stearns did not breach its duty to cooperate by settling underlying claims without insurer consent where the insurers had unequivocally denied coverage.  J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2016 WL 3943731 (N.Y. Sup. Ct. New York Cnty. July 7, 2016).

Bear Stearns sought a declaration that its insurers were required to indemnify it for settlements reached with the SEC, the New York Stock Exchange and private litigants in connection with deceptive practices claims.  The insurers argued that they had no duty to indemnify because Bear Stearns breached the consent to settle and cooperation provisions in the policies.  Bear Stearns moved to dismiss the defenses, which the court granted.

The court held that a consent to settle provision is a condition precedent to coverage and that a policyholder’s failure to comply is generally a defense to coverage under the policy.  However, where an insurer repudiates liability on the ground that the loss is not covered under the policy, the policyholder does not need to obtain the insurer’s consent to settle, so long as the settlement is reasonable.  The court held that the factual record established that the insurers disclaimed coverage prior to Bear Stearns’s settlement with the SEC because they “consistently asserted, from the inception of the regulatory investigations, that those investigations did not appear to constitute a claim.”  The court also found that the insurers consistently argued that even if the investigations constituted a claim, the losses were uninsurable disgorgement claims.  (See January 2015, March 2014, June 2013 Alerts).  The court concluded that these factors established as a matter of law that the insurers disclaimed coverage prior to Bear Stearns’s settlement.

Based on this factual finding, the court rejected the insurers’ argument that they had not conclusively denied coverage because they continued to reserve their rights during litigation and advised Bear Stearns that their determination was “non-final.”  The court held that  the insurers’ other statements “left no doubt that they were disclaiming coverage.”  The court also dismissed the insurers’ failure to cooperate defense, explaining that the burden of proving non-cooperation is “heavy” and that the factual record did not support the assertion that the insurers “diligently sought Bear Stearns’s cooperation or that Bear Stearns willfully obstructed these efforts.”  Notably, the court held that an issue of fact existed as to whether the settlements were reasonable, a determination that will ultimately control the insurers’ indemnity obligations.