Reed Smith Client Alerts

J.P. Morgan Securities Inc. v. Vigilant Insurance Co., No. 61 (N.Y. Nov. 23, 2021)

Late last month, New York’s highest court held that a policyholder’s $140 million “disgorgement” payment to the Securities and Exchange Commission (SEC) to resolve an investigation into alleged market timing and late trading was a covered loss under a broker/dealer liability policy and was not excluded from coverage as a “penalty imposed by law.” In so holding, the Court of Appeals rejected the intermediate appellate court’s reasoning that the U.S. Supreme Court’s decision in Kokesh v. SEC was controlling and necessitated that a “disgorgement” payment is a “penalty.” The New York Court of Appeals here joined with other courts in confirming that courts must look beyond the labels affixed to settlement payments when construing insurance coverage.


In J.P. Morgan Securities Inc. v. Vigilant Insurance Co., the New York Court of Appeals was asked to determine whether a $140 million “disgorgement” payment paid by J.P. Morgan’s predecessor in interest, Bear Stearns, to the SEC over alleged illegal trading practices was a “penalty imposed by law,” and thus excluded from coverage under the insurance policy at issue. By way of background, in 2000, Bear Stearns purchased a primary insurance policy from Vigilant Insurance. The policy provided coverage for the “wrongful acts” of the company but excluded “fines and penalties imposed by law” from the definition of covered “loss.” Starting in 2003, the SEC began investigating Bear Stearns for late trading and deceptive market timing practices. Bear Stearns ultimately settled with the SEC in 2006, agreeing to pay a $160 million “disgorgement” payment and a $90 million payment for “civil money penalties.” $140 million of the disgorgement payment purportedly reflected an estimate of the profits gained by Bear Stearns’ clients as a result of the illegal activity. Following its settlement with the SEC, Bear Stearns sought coverage from Vigilant for the $140 million portion of the payment. Litigation ensued.

Court’s analysis

In concluding that the $140 million “disgorgement” payment was not a “penalty imposed by law,” the Court of Appeals began its analysis by laying out the general principles of New York insurance law. The court noted that the issue presented was “a question of contract interpretation” and that under New York law, insurance contracts “must be interpreted according to common speech and consistent with the reasonable expectation of the average insured at the time of contract.” The court’s focus on the reasonable expectations of the insured would animate the remainder of its opinion.