SEC Consent Order Does Not Trigger Dishonesty Exclusion Where Insured Does Not Admit Guilt; Loss May Be Uninsurable by Law

A New York state intermediate appellate court has held that SEC administrative orders and related settlements do not trigger the final adjudication language in a policy’s dishonesty exclusion because the orders expressly stated that the insured did not admit any of the alleged wrongdoing.  J.P. Morgan Securities Inc. v. Vigilant Ins. Co., 2015 WL 175512 (N.Y. App. Div. Jan. 15, 2015).  The court also held that the insurers could pursue their defense of a public policy prohibition on insurance coverage for amounts paid by the insured as a result of intentional harm caused to others.

The Securities Exchange Commission (SEC) and other regulatory entities investigated a broker-dealer and a clearing firm for alleged late trading and deceptive market timing on behalf of certain mutual fund customers.  The insured ultimately settled with the SEC and agreed to pay $160 million as “disgorgement” and $90 million as a civil penalty “solely for the purpose of these proceedings” and “without admitting or denying findings.”  The insured also agreed to a series of findings by the New York Stock Exchange and paid $14 million to settle related civil class action lawsuits.

The insured sought coverage for the settlements under its professional liability insurance.  The insurers denied coverage on several bases, including the application of a dishonesty exclusion, which barred coverage if a “judgment or other final adjudication thereof adverse to such Inured shall establish that such Insured was guilty of any deliberate, dishonest, fraudulent or criminal act or omission.”  The insurers argued that the administrative orders contained a series of detailed “findings” that constitute a final adjudication of the insured’s wrongdoing, which triggers the exclusion.

The court disagreed with the insurers, ruling that the settlement orders did not “establish” any wrongdoing by the insured because they expressly provide that the insured is not admitting or denying the “findings” set forth in the orders.  As such, the court held, the dishonesty exclusion was not triggered.

The insurers also asserted an affirmative defense that public policy prohibits insurance coverage for amounts paid by the insured as a result of intentional harm caused by the insured.  The insured argued that the absence of an adjudication of wrongdoing bars the insurers from relying on the settlement orders for purposes of their public policy defense.  The court disagreed with the insured, holding that the court’s strong interest in enforcing public policy permits the use of the settlement orders to establish a public policy defense against insuring intentional wrongdoing, even though the orders did not establish intentional misconduct sufficient to trigger the dishonesty exclusion.

Wiley Executive Summary

Sign up for updates

Wiley Rein LLP Cookie Preference Center

Your Privacy

When you visit our website, we use cookies on your browser to collect information. The information collected might relate to you, your preferences, or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. For more information about how we use Cookies, please see our Privacy Policy.

Strictly Necessary Cookies

Always Active

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Functional Cookies

Always Active

Some functions of the site require remembering user choices, for example your cookie preference, or keyword search highlighting. These do not store any personal information.

Form Submissions

Always Active

When submitting your data, for example on a contact form or event registration, a cookie might be used to monitor the state of your submission across pages.

Performance Cookies

Performance cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.

Powered by Firmseek