In J.P. Morgan Securities, Inc. v. Vigilant Insurance Co., No. 113 (N.Y. June 11, 2013), the New York Court of Appeals held that J.P. Morgan Securities (JPM) may seek recovery from its insurers of a settlement amount paid to the SEC constituting disgorgement of ill-gotten gains received by JPM’s customers, not by JPM. The relevant policies excluded from the definition of “Loss” any “fines or penalties imposed by law” and “matters which are uninsurable under the law.” Bear Stearns argued that its “disgorgement” payment was not excluded under either the definition of “Loss” or certain policy exclusions because a substantial portion of the payment – $140 million – represented illegal profits obtained by its hedge fund customers, not Bear Stearns itself. Bear Stearns’ insurers argued that public policy considerations barred coverage for Bear Stearns’ willful violations of law and “disgorgement,” in addition to the operation of the exclusions. The Court of Appeals held that the order issued by the SEC in connection with the settlement did not conclusively demonstrate that Bear Stearns had the requisite intent to cause harm necessary to bar coverage under New York public policy, notwithstanding the SEC order’s finding of “willful” violations by Bear Stearns. Moreover, the Court held that the public policy rationale for precluding indemnity for disgorgement properly applies only where the ill-gotten gains were received by the insured, but not where the gains went to third parties: “The Insurers have not identified a single precedent, from New York or otherwise, in which coverage was prohibited where, as Bear Stearns claims, the disgorgement payment was (at least in large part) linked to gains that went to others. Consequently, at this early juncture, we conclude that the Insurers are not entitled to dismissal of Bear Stearns' insurance claims related to the SEC disgorgement payment.”