Settlement Payments Not Uninsurable Disgorgement Where Not Conclusively Linked To Improperly Acquired Funds

Applying New York law, the Delaware Supreme Court has held that settlement payments that were not conclusively linked to disgorgement damages were insurable under New York public policy.  In re TIAA-CREF Ins. Appeals, 2018 WL 3620873 (Del. July 30, 2018).

An insured financial services company offered investors the ability to invest in funds.  When an investor sought to sell shares, the investor’s sell order was not processed immediately.  As a result, the share price could differ between the date of processing and the date of the sale order.  The difference between these two amounts were passed onto the shareholders; selling investors received the value of the shares as of the date of the sale order.

Several class actions were filed by investors who sold shares in circumstances where they increased in value between the date of the sale order and the date of processing.  The financial services company tendered the class actions to its professional liability insurers and eventually sought coverage for settlements of those cases.  Those insurers denied coverage on various grounds, including that the settlement payments represented uninsurable disgorgement.

The trial court held as a matter of law that the settlement payments were not “disgorgements.”  The appellate court agreed that New York public policy did not bar coverage for the settlements.  The court noted that there was no finding that the alleged damages constituted an ill-gotten gain in any forum—and that such a finding could not have been made, because the financial services company did not profit from its accounting practices, but rather passed on any gains or losses to the investors in the funds as a whole.

The court below had rejected the insured’s argument based on Taco Bell Corp. v. Continental Casualty Co., 388 F.3d 1069, 1075–76 (7th Cir. 2004), that the insured’s defense costs were reasonable merely because it had paid the costs, noting that Delaware and New York did not adopt the reasoning established in Taco Bell.  The trial court required the finder of fact to determine whether the defense costs were reasonable.  At trial, the jury agreed with the insured’s expert that all of the insured’s defense costs were reasonable.  The appellate court found that the expert “adequately explained the basis for his opinion” and upheld the jury’s finding.

The appellate court also agreed with the excess carriers that the insured was not entitled to prejudgment interest until the underlying insurance policy paid out, which it had not.  It also agreed with the primary carrier that it was not liable for consequential damages caused by the loss of prejudgment interest against the excess carriers.

Finally, the court upheld a jury verdict for one of the excess carriers on the grounds that the insured did not comply with the consent to settle and notice provisions of its policy.  The jury found that the carrier did not waive its right to assert compliance with those clauses.  On appeal, the insured argued that the excess carrier did not expressly reference the consent and notice clauses in its affirmative defenses.  The court disagreed, noting that the excess carrier did assert (among other things) in its answer that the insured generally failed to satisfy conditions precedent to coverage.