HNRK Coverage Corner
On November 23, 2021, the New York Court of Appeals issued a decision in J.P. Morgan Secs. Inc. v. Vigilant Ins. Co., 2021 NY Slip Op 06528, resolving a long-standing coverage dispute over whether a disgorgement payment made as part of the settlement of an SEC enforcement action constituted a “penalty” that was excluded from coverage under a liability policy’s definition of “loss.” The Appellate Division, First Department, in a decision previously covered on this blog, held that the payment was a penalty. That decision relied principally on a 2017 decision of the United States Supreme Court, issued long after the events at issue, holding that such a disgorgement payment was a “penalty” for purposes of determining the applicable statute of limitations for an enforcement action.
The Court of Appeals (with Judge Rivera dissenting) reversed the First Department and held that the payment was not a “fine or penalty” under the policy. The decision articulates at least two important interpretive principles.
First, the Court observes that “limiting language in the definition of coverage” (such as the carve-out of “fines or penalties” from the definition of “loss”’) is subject to the same standard applicable to policy exclusions: the insurer bears the burden of demonstrating that the limitation applies. This is a definitive rejection of the argument sometimes made by insurers that coverage limitations appearing in an insuring clause are not subject to the rules governing interpretation of policy provisions that are expressly denominated an exclusion.
Second, the decision emphasizes the important principle that an insurance policy must be construed from the perspective of a reasonable person in the insured’s business at the time the policy was issued. The majority observed that “when the parties entered into these insurance contracts, the SEC believed it had the power—as an equitable remedy—to require an entity that facilitated wrongdoing to ‘disgorge’ profits wrongfully obtained by third parties.” The subsequent Supreme Court decision characterizing the disgorgement remedy as a “penalty” was not controlling, as the “regulatory climate in effect at the time these insurers agreed to provide coverage” was the relevant context for interpreting the policy.
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Bradley Nash represents policyholders in insurance disputes and other parties in complex commercial litigation in state and federal courts in New York and across the country. Brad focuses his practice on insurance recovery for ...
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