This Week At The Court Of Appeals

J. P. Morgan Securities Inc. v. Vigilant Insurance Co.:

The plaintiffs commenced this insurance coverage action after their insurers disclaimed coverage for more than $200 million in damages related to an underlying SEC investigation, settlement, and shareholder lawsuits.  The claimed damages stem from allegations that the plaintiffs facilitated late trading in violation of various securities laws.  As a result of the investigation, the plaintiffs agreed to pay $160 million as “disgorgement” in a settlement that neither admitted nor denied the SEC’s findings.  The $160 million itself allegedly represented disgorgement of an estimated $20 million in fees and commissions and $140 million of profits that customers made on illegal trades.

The defendant insurers provided professional liability policies covering loss incurred from “any Wrongful Act,” which included settlements and compensatory damages but not fines or penalties imposed by law or costs that are legally uninsurable.  The policies also excluded claims based upon or arising out of the insured “gaining in fact any personal profit or advantage to which [it] was not legally entitled.”   The insurers disclaimed, claiming the disgorgement was not an insurable loss and was excluded from coverage.

In response to the complaint, the insurers moved to dismiss the action under CPLR 3211 (a)(1) & (7), claiming there was documentary evidence precluding recovery, highlighting the SEC findings, or that the pleadings failed to state a claim.  The trial court denied the motion to dismiss and the defendants appealed.  The Appellate Division, First Department, reversed and dismissed the complaint, holding that the “disgorgement of ill-gotten gains . . . does not constitute an insurable loss.”  The First Department wrote that wrongdoers should not be permitted to shift the cost to an insurer and “retain the proceeds of his or her illegal acts.”  The plaintiffs argue, among other things, that the disgorgement is a covered loss because it did not receive ill-gotten gains and was not unjustly enriched.

Oral argument will be Wednesday, May 1, 2013. The Court streams oral arguments online. To watch live, you can visit the New York Court of Appeals website on Wednesday around 3:30 p.m. and click on the “Oral Arguments Webcast” link on the right-hand side of the page.