The question in this case is whether an insurance policy’s exclusion for “fines or penalties imposed by law” applies to an order of disgorgement issued by the Securities and Exchange Commission.
In 2006, the SEC settled with Bear Stearns after investigating the firm for practices that appeared to violate the federal securities laws. The SEC believed that Bear Stearns had helped its hedge-fund customers engage in illegal trades in a way that evaded regulatory detection. As part of the settlement, the Bear Stearns consented to an SEC order requiring it to pay $160 million in “disgorgement.”
Bear Stearns sought insurance coverage for its $160 million disgorgement payment, and Bear Stearns’s insurers denied the request. Those insurers claimed that New York public policy barred insurance coverage for disgorgement of ill-gotten gains.
Bear Stearns’s successor-in-interest, J.P. Morgan, then sued the insurers for breach of contract, claiming that the cited public-policy exception did not apply when, as here, the ill-gotten gains accrued to someone other than the insurance policyholder. The Court of Appeals ultimately agreed in a prior appeal, reversing the dismissal of J.P. Morgan’s complaint. In the Court’s view, New York’s public policy barred a party from recovering insurance proceeds for the disgorgement of its own ill-gotten gains. Yet as the Court noted, there were factual disputes about whether the ill-gotten gains that the SEC ordered disgorged accrued to Bear Stearns’s hedge-fund clients—and not to Bear Stearns.
On remand, Supreme Court granted J.P. Morgan summary judgment dismissing the insurers’ defenses based on exclusions in the insurance policies. The court held that none of the policies’ exclusions applied.
Two months later, the U.S. Supreme Court ruled in Kokesh v. SEC, 137 S.Ct. 1635 (2017), that disgorgement is a penalty rather than a remedy.
Based on Kokesh, the First Department unanimously reversed the decision below and granted the insurers summary judgment. The court focused on the insurance policies’ definition of “Loss,” which includes “compensatory damages” and “costs, charges and expenses or other damages incurred in connection with any investigation by any governmental body,” but excludes “fines or penalties imposed by law.” The court considered Kokesh dispositive. Because Kokesh held that disgorgement is a penalty, Bear Stearns’s disgorgement payment falls within the policies’ exclusion for penalties.
In so holding, the court rejected J.P. Morgan’s argument that the Court of Appeals’ prior ruling was law of the case. As the First Department explained, the Court of Appeals did not previously consider whether disgorgement was an excluded penalty. And even if it had, the U.S. Supreme Court’s ruling in Kokesh would be a change in law that would override the law-of-the-case doctrine.
The Court of Appeals granted leave to appeal.
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