Vigilant Ins. Co. v. Bear Stearns Companies, Inc., 10 N.Y.3d 170 (2008)
An insured breaches a policy provision requiring insurer consent before settling claims above a certain threshold when the insured finalizes a settlement agreement without notifying or obtaining approval from the insurer, thereby relieving the insurer of liability for the settlement.
Summary
Bear Stearns settled regulatory actions without its insurers’ consent, violating a policy provision requiring consent for settlements exceeding $5 million. The insurers then sought a declaratory judgment that they were not liable for the settlement amount. The New York Court of Appeals held that Bear Stearns’ execution of a settlement agreement without prior consent from the insurers constituted a breach of the insurance contract. This breach relieved the insurers of their obligation to cover the settlement costs. The court emphasized the unambiguous nature of the consent provision and the sophistication of Bear Stearns as a business entity.
Facts
Bear Stearns, a financial services firm, had a primary professional liability insurance policy with Vigilant Insurance Company, supplemented by excess policies from Federal Insurance Company and Gulf Insurance Company. The policies required Bear Stearns to obtain insurer consent before settling any claim exceeding $5 million. In 2002, Bear Stearns became subject to a joint investigation by the SEC, NASD, NYSE, and state attorneys general regarding research analyst practices. Bear Stearns signed a settlement-in-principle and later a consent agreement, agreeing to pay $80 million without admitting or denying allegations. Only after executing these agreements did Bear Stearns notify its insurers.
Procedural History
The insurers filed a declaratory judgment action, arguing they were not liable due to Bear Stearns’ breach of the consent provision, an investment banking exclusion, and arguments related to disgorgement and other payments. The Supreme Court found triable issues of fact regarding the breach of consent and the investment banking exclusion, but sided with the insurers on the disgorgement issue. The Appellate Division modified, granting Bear Stearns summary judgment on the investment banking exclusion and disgorgement issues. The Court of Appeals reversed, granting the insurers summary judgment.
Issue(s)
Whether Bear Stearns breached the insurance policy provision requiring it to obtain the insurers’ consent before settling claims exceeding $5 million when it executed settlement agreements with regulators without prior notification or approval from its insurers.
Holding
Yes, because Bear Stearns finalized a settlement agreement by executing the consent agreement with regulators before seeking or obtaining consent from its insurers, violating the explicit terms of the insurance policy.
Court’s Reasoning
The Court of Appeals emphasized the unambiguous language of the insurance contract, which stipulated that the insurers would not be liable for any settlement exceeding $5 million entered into without their consent. The court found that Bear Stearns’ execution of the April 2003 consent agreement constituted a settlement because it committed Bear Stearns to paying $80 million to resolve regulatory actions, and it allowed the SEC to enter a final judgment without further notice to Bear Stearns. The Court stated, “As a sophisticated business entity, Bear Stearns expressly agreed that the insurers would ‘not be liable’ for any settlement in excess of $5 million entered into without their consent.” The court rejected the argument that the settlement was not final until court approval, stating that Bear Stearns was bound by the agreement’s terms upon execution, regardless of later court approval. The key policy consideration was enforcing the clear contractual agreement between the parties. Because Bear Stearns acted unilaterally to settle the claim, it could not then seek indemnification from its insurers for the settlement amount. The court distinguished this situation from cases where settlement agreements were explicitly contingent on insurer approval. The court concluded that “Parties are free to enter into a valid settlement agreement that is made subject to court approval. Notably absent from the agreement, however, was any provision similarly subjecting it to the insurers’ approval.”