Not Required When Insurer Previously Disclaimed Coverage

The New York Supreme Court, Appellate Division, applying New York law, affirmed the lower court’s opinion that Bear Stearns did not breach its contractual obligations to its insurers by failing to obtain their consent prior to settling with the Securities and Exchange Commission, the New York Stock Exchange, and related private litigation, because the insurers had previously denied coverage for the claims.

The insurance policies at issue required the insured to obtain the insurers’ permission for any settlements greater than $5 Million.  However, under New York law, where an insurer denies liability, the insured is free to enter into a reasonable settlement without obtaining the insurer’s consent.   The appellate court held Bear Stearns was justified in settling its claims without the insurers’ consent based on: (1) the insurers’ unreasonable delay in dealing with the claims, (2) the insurers’ consistent position that the claims against Bear Stearns did not constitute claims under the contracts, and (3) the insurers’ contention that the disgorgement payments that were demanded by the regulators were not insurable as a matter of law.  The appellate court also held that the insurers’ disclaimer of coverage excused the insured for any alleged breach of their duty to cooperate.   According to the appellate court, the “reservation of rights” language in the insurers’ letters to the insureds did not change the fact that the insurers unequivocally and continually disclaimed coverage.   J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2017 Slip Op 05181 (N.Y. App. Div. June 27, 2017).