Edwards Angell Palmer & Dodge, LLP recently obtained a decision and order from the Supreme Court of the State of New York, New York County, granting its client Select Insurance Company’s motion for summary judgment, dismissing the complaint of the hedge fund insured.
Select insured the plaintiff under a Mutual Fund and Directors and Officers Errors and Omissions Liability Insurance Policy issued by Select with a policy limit of $10 million. In July and September 2003, respectively, the Attorney General of the State of New York and the Securities and Exchange Commission commenced investigations into the plaintiff’s trading practices relating to market timing and late trading of mutual funds. In order to resolve these proceedings, the hedge fund entered into settlement agreements and agreed to pay $148 million in disgorgement. The hedge fund did not seek reimbursement from Select for the disgorgement payment, but did seek reimbursement for over $19 million in defense costs paid as a result of the investigations. Select denied liability for Loss (as defined by the Policy) resulting from the investigations. The fund then brought suit against Select.
The Court stated that “[a]s explained in Vigilant Ins. Co. v. Credit Suisse First Boston Corp. [10 A.D.3d 259, 529 [1st Dep’t 2004][“Vigilant”]) ‘disgorgement of ‘ill-gotten funds is not insurable under the law’ because such disgorgement does not constitute ‘damages’ or a ‘loss’ as those terms are used in insurance policies.’ Moreover, where defense costs are a component of uninsurable loss, a party may not be reimbursed for those costs as they ‘are only recoverable for covered claims.’” In granting Select’s motion for summary judgment, the Court held that “[plaintiff]’s efforts to distinguish Vigilant are unavailing. The policy provisions here and in Vigilant are virtually identical. Both define ‘Loss’ as including defense costs but not matters uninsurable under governing law. The reasoning of Vigilant – that disgorgement of improperly acquired funds is not a covered loss, and that defense costs in connection with a claim for disgorgement are therefore also not a covered loss – is equally applicable here.”
Judgment dismissing the complaint as against Select was entered on March 13, 2009. The decision can be found here or on Westlaw at 2009 WL 586127.