A New York trial court recently recognized that insurers may not deny coverage for a claim, and then, if the denial was improper, object to a policyholder’s settlement without their consent. The July 11, 2016 decision was issued by Justice Ramos in J.P. Morgan Securities, Inc., v. Vigilant Insurance Company Co., a case in which the policyholder sought coverage for investigation demands issued by the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) as well as related class actions alleging that Bear Stearns facilitated deceptive market timing and late trading activities. The insurer denied coverage, contending that the investigative demands were not “claims” as defined in the professional liability policy, and that even if they were claims, they sought the uninsurable relief of disgorgement. After receiving the insurer’s denial of coverage, Bear Stearns then settled the claims against it. The insurer objected, asserting that Bear Stearns failed to obtain its consent to the settlement, and similarly failed to cooperate with the insurer.

Seeking summary judgment, Bear Stearns asserted that it was permitted to settle the underlying claims without first obtaining the insurer’s consent because the insurer had already denied coverage. The court agreed, holding that although the policy’s consent to settlement provision is a condition precedent to coverage, if the insurer denies coverage, a policyholder is excused from complying with the consent provision. The insurer here repeatedly asserted in its coverage correspondence that the investigations did not appear to be “claims” and that any resulting relief would be uninsurable as a matter of law. The court held that the insurer’s communications “effectively disclaimed” coverage—notwithstanding boilerplate reservation of rights language—relieving the policyholder, Bear Stearns, of its obligation to obtain the insurer’s prior consent to a reasonable settlement. Justice Ramos recognized that “[a]n insurer declines coverage at its own risk.”

The court rejected the insurer’s position that investigative demands issued by the SEC and NYSE, as well as a subpoena issued by the New York Attorney General (NYAG) did not constitute a “claim” under the policy, which was defined to include “[a]ny investigation into possible violations of law or regulation initiated by any governmental body or self-regulatory organization.” The court also rejected the insurer’s argument that the policyholder breached its duty to cooperate, emphasizing an insurer’s “heavy burden” to demonstrate that it diligently sought to obtain a policyholder’s cooperation. The court denied summary judgment about whether the settlement was reasonable.

While policyholders need to comply with contractual duties to cooperate with their insurers and seek the insurers’ consent to settlement, this decision is an important reminder that if the insurers deny coverage—whether explicitly or through effective disclaimer—policyholders are relieved of those duties. The decision also highlights the importance of the definition of “claim” in a policy, which can provide meaningful coverage for regulatory investigations.