On March 13, 2008, the New York Court of Appeals ruled that Bear Stearns Companies, Inc., was not entitled to insurance for its $80 million settlement with the Securities and Exchange Commission, the National Association of Securities Dealers, and the New York Stock Exchange, because it failed to obtain its insurers’ consent to the settlement. Vigilant Insur. Co., et al. v. The Bear Stearns Companies, Inc., 2008 WL 65620 (N.Y. Mar. 13, 2008).

Background of the Regulatory Claims and Settlement

In early 2002, the SEC, NASD and NYSE, along with state attorneys general, initiated a joint investigation into the practices of research analysts at various financial services firms, focusing on the potential conflicts of interest arising from the relationship between the analysts‘ research functions and investment banking objectives. Bear Stearns, a financial services firm, was among the companies investigated.

On December 20, 2002, Bear Stearns signed a settlement-in-principle with the SEC, NASD and NYSE to settle the claims. On April 21, 2003, Bear Stearns consented to be permanently enjoined from violating a number of NASD and NYSE rules and agreed to pay a total of $80 million to fully resolve the pending regulatory claims. The settlement was allocated $25 million as a penalty, $25 million in disgorgement, $25 million for independent research and $5 million for investor education. Three days after executing the settlement agreement, Bear Stearns sent letters to its insurers requesting their consent to the settlement.

Bear Stearns’ Insurance Policies

Bear Stearns‘ primary professional liability insurance policy, issued by Vigilant Insurance Company (the “Policy”), provided $10 million in coverage for losses resulting from claims against the insured for its ”wrongful acts.“ The Policy attached in excess of a $10 million self-insured retention. In addition, Bear Stearns had another $40 million in follow form excess coverage. The Policy required Bear Stearns to obtain the consent of its insurers prior to agreeing to settle any claim in excess of $5 million.

The Coverage Dispute

The insurers denied coverage for the settlement on a number of grounds and brought a declaratory judgment action in the state supreme court. First, they argued that the insured had breached the policy provision obligating it to obtain the insurers’ consent before entering into the settlement. They also denied on the basis of the investment banking exclusion in the policy and argued that certain portions of the settlement did not constitute covered “losses.”

The insurers moved for summary judgment. The state supreme court found an issue of fact as to when the settlement became final and, therefore, whether Bear Stearns breached the provision obligating it to obtain the consent of the insurers prior to settlement. The court also stated that factual issues existed as to whether the disgorgement payment was actually attributable to “ill-gotten gains or improperly acquired funds.” It also held that the investment banking exclusion was not applicable and rejected the insurers‘ contention that the combined $30 million payment for independent research and investor education was not a covered loss. The insurers appealed.

The Appellate Division granted summary judgment to Bear Stearns on the investment banking exclusion and independent research/investor education issues and denied summary judgment to the insurers on the disgorgement issue. The court agreed that an issue of fact existed as to whether Bear Stearns had breached the policy obligation to obtain consent to settlement. The insurers appealed, raising a number of objections to the Appellate Division order. In particular, the insurers argued that Bear Stearns resolved and finalized the settlement of the case when it executed the settlement-in-principle in December 2002, or, at the latest, when it signed the consent agreement in April 2003, without advising the insurers.

The Court of Appeals Decision

The Court of Appeals deemed it necessary to address only the single question of whether the company had breached the consent to settlement provision in the Policy. The court noted that in the April 2003 settlement agreement, Bear Stearns agreed to pay $80 million and to be permanently enjoined from violating certain NASD and NYSE rules in order to resolve all the pending regulatory claims against it. The court also noted that in that agreement, Bear Stearns acknowledged that the SEC could present a final judgment to the federal court for signature and entry without further notice to the company, evidencing Bear Stearns‘ intention to settle the matter fully at that time. Moreover, Bear Stearns did not provide that the settlement was subject to its insurers' approval. Thus, even though the federal court did not approve the settlement until October 2003, the court determined that the parties had fully resolved the claim in April 2003. Since Bear Stearns had failed to obtain insurer approval of the settlement prior to that date, as required by the terms of the Policy, the court held that Bear Stearns was barred from recovering the settlement proceeds from the insurers.


Unfortunately, in the exigency of litigation, insurance can become an afterthought. Lapses most frequently occur in the notice process, and late notice of a claim often forecloses coverage. However, all insurance policies require the cooperation of the insured, and many policies require the insurers’ consent to settlement, or even to litigation decisions. The adversarial posture that often exists between companies and their insurers can also cause a company to avoid keeping its insurer informed or not seek its approval. Insurance management is an essential component of any litigation strategy.