“Findings” of Wrong-Doing in Bear Stearns’ Settlement Agreements with the Securities and Exchange Commission and the New York Stock Exchange Did Not Constitute an “Adjudication” of Wrong-Doing Which Would Support the Insurer’s Affirmative Defense Based Upon the “Dishonest Acts Exclusion” in the Professional Liability Insurance Policy—However, the Insurer’s Affirmative Defense Based Upon the Public Policy Precluding Coverage for Intentional Harm to Others Should Not Have Been Dismissed

The First Department, in a full-fledged opinion by Justice Mazzarelli, determined that the “dishonest acts exclusion” in the professional liability insurance policy issued by the defendant to the plaintiff (Bear Stearns) could not be used as an affirmative defense in Bear Stearns’ action seeking coverage for settlements paid by Bear Stearns.  Bear Stearns had entered settlement agreements with the Securities & Exchange Commission (SEC) and the New York Stock Exchange (NYSE) in which “findings” of misconduct were made.  The question before the First Department was whether those “findings” constituted an “adjudication” of wrong-doing such that the “dishonest acts exclusion” prohibited recovery from the insurer.  The First Department held that the “findings” did not constitute an adjudciation and the affirmative defense based on the “dishonest acts exclusion” was properly dismissed.  However, the First Department further found the affirmative defense based upon public policy (precluding coverage for monies paid by the insured as a result of intentional harm to others) should not have been dismissed:

Here, the issue is the applicability of the Dishonest Acts Exclusion, so defendants bear the specific burden of demonstrating that a settlement constitutes an “adjudication” for purposes of the exclusion.

In arguing that the term “adjudication” means any resolution of a dispute that has specific consequences for a party, defendants virtually ignore the part of the Dishonest Acts Exclusion that requires that any adjudication “establish that such Insured(s) were guilty of any deliberate, dishonest, fraudulent or criminal act or omission” (emphasis added). Defendants quote the dictionary definition of “adjudication,” but fail to note that “establish” is defined, in this context, as “to put beyond doubt” (Merriam—Webster’s Collegiate Dictionary [11th ed 2003]). It can hardly be said that the SEC Order and the NYSE Stipulation put Bear Stearns’s guilt “beyond doubt,” when those very same documents expressly provided that Bear Stearns did not admit guilt, and reserved the right to profess its innocence in unrelated proceedings. Again, in interpreting the policy we are guided by reason, and defendants’ position that the settlement documents “establish” guilt is not reasonable. * * *

Because the Dishonest Acts Exclusion does not apply, the motion court properly dismissed defendants’ affirmative defense based on that exclusion. However, the court should not have dismissed the affirmative defense invoking the public policy against permitting insurance coverage for disgorgement, to the extent it is based on the settlements with the SEC and the NYSE. Bear Stearns argues that the absence of an adjudication of wrongdoing within the meaning of the Dishonest Acts Exclusion bars defendants from relying on the “findings” in the settlement orders for purposes of the public policy doctrine. Again, however, as the Court of Appeals stated in the prior appeal, one of the two situations in which the contractual language of a policy may be overwritten is where an insured engages in conduct “with the intent to cause injury” … . JP Morgan Sec Inc v Vigilant Ins Co, 2015 NY Slip Op 00462, 1st Dept 1-15-15