The Big, Bad Bear of Wall Street disintegrated earlier this week. Shortly before its demise, the Bear suffered a significant insurance loss at the hands of the New York Court of Appeals. Vigilant Ins. Co. v. The Bear Stearns Companies, Inc., No. 25 (N.Y. March 13, 2008).
You may recall in 2002, the SEC and the NYSE started investigating practices of research analysts and the potential conflicts that could arise from the relationship between research functions and investment banking objectives. Bear Stearns was one of the financial service firms under investigation and was ultimately sued by the SEC. On December 20, 2002, Bear Stearns signed a settlement document agreeing to pay $80 million, including a $25 million penalty. A few months later, the Bear executed a consent agreement acceding to entry of a final judgment. The Bear agreed not to seek insurance coverage for the $25 million penalty.
Three days after executing the settlement agreement, Bear notified its insurers. The insurers disclaimed coverage and filed for a declaratory judgment that the $45 million sought by Bear was not covered. The policy prohibited the insured from settling any claim over $5 million without the insurer’s consent. The insurers argued Bear breached this provision. The lower court denied the insurers’ motion for summary judgment, finding issues of fact as to whether Bear breached the policy.
The Court of Appeals disagreed, determining Bear breached the provision by settling before notifying the insurers or obtaining their approval. Bear elected to finalize the settlement and execute a consent agreement before informing its carriers of the terms of the settlement.
The Hawaii Supreme Court has favored the insured where an insurer unreasonably refuses to consent to settlement. See, e.g., Granger v. Gov’t Employees Ins. Co., 111 Ha. 160, 140 P.3d 393 (2006); Taylor v. Gov’t Employees Ins. Co. v. Taylor, 90 Haw. 302, 978 P.2d 740 (1999). The insureds in these cases at least complied with policy requirements by giving notice and seeking consent of the insurers. Bear may have obtained a similar result and coverage had it bothered to follow the policy and notify its insurers of the pending settlement.
