I Suggest You Read the Blog Regarding Substantive Matters First
J.P. Morgan Securities, Inc. v. Vigilant Insurance Co., 21 N.Y.3d 324 (2013)


Although substantive legal issues (and contract interpretation issues) underlie this opinion in the New York Court of Appeals, they do not surface explicitly, until a 2021 decision of the Court in this case.  In this opinion, issues of public policy and procedural matters are the most prominent issues. 

In this part of the case, the issue was whether the insurers could obtain early dismissal of the insured’s lawsuit against them seeking indemnity. At the same time, this case contains–or carries with it–issues and law as to matters of insurance, such as insurability, and not just civil procedure.  It also involves how to think about principles of public policy and their proper role in judicial decision-making. All these dimensions make the court’s decision and this opinion of nationwide–indeed, international–interest to insurance coverage geeks everywhere, especially if they are involved in complex, “upper level” business and financial insurance and/or issues involving directors and officers liability insurance. 

In any case, the New York Court of Appeals begins with the fact that the insurers’ motion to dismiss (and get rid of the lawsuit early-on) was denied in the trial court but was granted in the intermediate court of appeals (or what New York law calls “the Appellate Division”).  The issue as to whether the motion should be granted or denied came to this court–the highest in the state.  

The dismissal of the case below came to New York’s highest court (the New York Court of Appeals) and the issue was whether the dismissal order was established conclusively. This question creates quite a different set of issues with which the 2013 opinion dealt and which the 2021 opinion took to have been established.  

Informally put, the 2013 opinion dealt with this “life-versus-death-of-the-case” procedural issue: Could the insured go forward with its case, or does it get thrown out early on–then-and-there, straight away–because public policy was so completely against it. Usually, these kinds of motions to dismiss are filed shortly after the plaintiff has served its complaint–what is known in Texas as its “Original Petition”–frequently before discovery has commenced. 

That appears to have been what happened in this case and that might well account for the long period of time between the 2013 filing of the Complaint and the 2021 Decision and Opinion.

In 2013, the Court of appeals said, “Go Forward.” The 2021 opinion dealt with a substantive issue: Might the insured be entitled to indemnity for the $140M it paid as disgorgement? (The Court of Appeals answered “Yes, though there is more adjudicative work to do.”) 

Here is an important point to keep in mind in order to grasp the framework within which the litigation took place: the insurance policies at issue in this case are variants of or quite similar to Directors and Officers (Professional) Liability policies. Some of the issues in this case closely resemble the kinds of issues that arise in D&O cases.


In this opinion, Bear Stearns (BS), which became part of the J.P. Morgan family of companies in 2008, (hence the way the plaintiff is named in the style of the case) engaged in “after-hours trading” of an improper sort. (Both opinions contain a description of this sort of activity.) Apparently, BS appeared to be functioning principally as “mere” brokers for several hedge fund companies, although it might have been somehow more intimately involved than that. From the descriptions found in both opinions of the court, the improper activity was using knowledge somehow acquired by the seller while the exchange was open but obtained in such a way is to impose huge losses on purchasing victims, in this case, investors in some mutual funds and make huge profits for itself. 

The SEC’s original case was absolutely enormous, but it and BS negotiated a settlement. There was an agreement that BS would pay disgorgement of $160M; $20M of this amount was for its own “sins”; the other $140M was apparently for the misconduct of BS’s hedge-fund clients somehow conducted and perhaps sponsored by BS. BS sought indemnity from its insurers for only the $140M and not the $20M, or so, that it conceded was not recoverable from its insurer. 

Ultimately, the key substantive issue, in this case, was the meaning of the word “Loss” in the policy, for which there was coverage and the meaning of the word “penalty” for which there was not. Sums paid out by the insured as penalties were excluded from being covered Loss[es]. Thus, while their policy excluded coverage for penalties, it did not exclude other payments generated by the insured’s performance of relevant acts, called “wrongful acts” in the policy, i.e., “any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by [BS].” 

In other words, more or less, the insurance at issue covered payments the insured had to make as the result of the consequences of its wrongful acts, but this coverage did not include amounts paid as penalties, although the coverage was much broader than injuries and damages for which there might be compensation required by law. In other words, the insurance covered “way more” than consequential damages, i.e., what liability policies usually cover, but not harm caused by acts undertaken with the specific intent of causing harm. The intentionality of the wrongful act for which there was insurance is irrelevant to determining coverage. All that matters is whether the person performing the wrongful act intended to cause harm.]


The intricacies of the language of the policy were not really an issue in this part of the case.  Those ideas are treated much more clearly and conclusively in the 2021 opinion in this case, which is where they belong. Here–in the 2013 parts of the case–the focus was on public policy and some contracts of insurance. See Footnote 6 to this opinion.] 

Right from the start, the insurers sought to get the case dismissed on the grounds that the remedy BS wanted was against deep and important public policy. The insurers failed in the trial court. They tried again in the intermediate appellate court–the Appellate Division–arguing, at least in substantial part, that profoundly important public policy was categorically against deliberate wrongdoers receiving insurance compensation; punishment by such things as penalties are what appropriate, not rewards of some sort.  In this case, said the insurers, government-demanded and then negotiated-in-settlement disgorgement was what was involved, and those are penal in nature–at least, in part, because they were designed to punish, prevent, and/or deter similar acts in the future by both the actor and others. In the “Appellate Division,” the insurers succeeded in obtaining an order of dismissal, and an appeal of that order which brought the matter to the Court of Appeals. 

It must be kept in mind that the issue before the Court of Appeals was more procedural in nature, than substantive, since it was seeking dismissal (more or less) based on the pleadings, with the law and public policy providing the framework. The rules of civil procedure in New York state are what is really important, for example, because it specifies the requirement that must be met in order to obtain a dismissal, based upon a relevant motion. Those rules, which apply to all sorts of civil suits, determine insurers’ burden of proof with respect to the following question, roughly speaking:  Does the plaintiff’s case, as brought, have enough discernible, “just-maybe” level, merit to entitle it to go forward in adjudication, or should the case be tossed out forthwith, because it is completely–or almost completely–without any merit, even if all the statements of fact in the plaintiff’s complaint are taken to be true. 


The insurers did not rely on statutes, the lack of statutes, precisely and directly relevant precedentially authoritative decisions from past courts. Instead, they relied on appeals to what the law and jurisprudence call “public policy.” [MQ: It generally consists of  profound principles of our legal system and/or polity generally regarded as central to justice. These principles are not totally consistent. As one might imagine, it is very difficult to win cases based solely on “Public Policy Arguments,” and this includes situations in which conflicting public policies are taken to clash.] The insurers propounded two very similar public policy arguments (“PPAs”).

PPA#1, as applied, goes like this: BS is not entitled to relief from its liability insurance carriers because it “enabled its customers, the guilty hedge-funds, to make millions through BS’s trading tactics, as well as their own.” 

PPA#2, as applied, is similar; BS is not entitled to relief from its liability insurance companies because New York public policy “prohibits insurance coverage for intentionally caused harm.”  

Naturally, BS rejected arguments, since it contended, among other reasons, that $140M of its $160M disgorgement was actually that of its hedge fund clients. 

It is worth noting in passing that, as the court observed, the Vigilant policy, and the policies of the excess carriers that followed Vigilant’s form, were liability policies. However, as is often the case in such policies, e.g., directors and officers liability policies, the insurer had no duty to defend, as has already been mentioned, although an insured may have a right of indemnity from its liability insurer under some circumstances, one of which may be that the insured turns out to have a right to coverage, does not have a liability, and so forth.

Part of BS’s argument that it should be able to proceed with its breach of contract case against the insurer was based on a claim that “as a clearing broker that processed transactions initiated by others, it did not knowingly violate any law; its management did not facilitate the late trading or market timing; and it did not share in the profits or benefits of the late trading, from which it received only $16.9 million in commissions.”

The SEC had demanded disgorgement for a variety of reasons, including facilitating what happened, hiding what was going on from the mutual funds which were the victims, and various of BS’s omissions, e.g., taking no steps to alter the process. In response to these and other demands, BS settled the case and agreed to other restrictions, e.g., in future private-law litigation arising out of this dark process.  Along the way, the SEC found that BS has “willfully” violated several laws regulating securities. The court did not take any of the SEC’s ruling as requiring dismissal of the insured’s lawsuit against its carriers.

In any case, the court was not sympathetic to the insurer’s public policy arguments.

First and foremost, the most significant public policy in this area of jurisprudence “Freedom of Contract. As is true everywhere in every state, freedom of contract is itself deeply, deeply rooted in public policy. This doctrine is true as to insurance policies, except when controlled by government regulation, whether by statute or by rule. It is a public policy deeply involved in New York jurisprudence, and the court’s opinion stated it by citing some of its own cases. Thus, as was been explained as an earlier case, courts “‘are reluctant to inhibit freedom of contract by finding insurance policy clauses violative of public policy.'” Slayko v. Security Mutual Insurance Company, 98 NY2d 309, 316-17 (2002).

At the same time, the court conceded that New York jurisprudence has two situations in which “countervailing public policy will override the freedom of contract, thereby precluding enforcement of an insurance agreement.” (1) Insurance companies may not insure against an insured’s losses due to punitive damage awards; policy provisions to the contrary are not enforceable. “The rationale underlying this public policy exception emphasizes that allowing [such] coverage ‘would defeat the purpose of punitive damages, which is to punish and to deter others from acting similarly.'” (2) Insureds may not, as a matter of public policy, successfully “seek coverage when it engages in conduct ‘with the intent to cause injury.'” (This citation is not from an insurance case.) Or to put it slightly differently (if at all really differently), “‘Indemnification agreements are unenforceable as violative of public policy only to the extent that they purport to indemnify a party for damages from intentional causation of injury.'” (This citation by the court is from an insurance case.)

The court saw the following clearly: the requirement of the exception to public policy is not that the insured deliberately (and therefore intentionally) performs a wrongful act. The public policy exception applies only to situations in which the insured intended to and did cause injury. [MQ: As a  purely academic point, maybe, notice that the court does not say “injury to a human person.”] It then concludes that it could not hold, as a matter of law, that this criterion was met. It would have to do this if it were to affirm the grant of the motion to dismiss under review. 

In the remainder of its unanimous opinion, the court discusses several other matters which need not be reviewed here.


It is interesting that Judge Rivera participated in the unanimous 2013 decision, but she was the lone dissented from the 2021 opinion of the court.  Chief Judge DiFiori was not on the court yet in 2013; she was appointed in 2015. Interestingly, both  Chief Judge DiFiori (R) and Judge Rivera (D) were appointed by the same then governor (D). There had been no controversy about the appointment of the Chief Judge DiFiori (R); in contrast, there had been an uproar about the appointment of Judge Rivera (D).


The content of this article, essay, post, or document should not be taken as legal advice to anyone, whether client, customer, or otherwise. Nor may it be taken to be anything a lawyer might perform for a client. In so far as it is other than accurate reporting. The observations are mine and not intended to be foundation of client or client-like decision-making.

Read Part II: Topics & Themes / Liability Insurance For Deliberate Conduct Causing Non-Fortuitous Consequences / Liability Insurance For Wrongful Acts And The Problems Of “Moral Hazard” / Liability Insurance For Disgorgements Interpreting The Language Of Policy Exclusions Under New York Law.