Lack of Consent to Settlement Leads to Loss of Insurance Coverage

April 14, 2008

In another bit of bad news for the Bear Stearns Companies, the New York Court of Appeals granted three insurers’ motions for summary judgment, eliminating $45 million in coverage that Bear Stearns expected to use as part of the funding for an $80 million settlement with the SEC, NASD, and the NYSE. The Court negated coverage based on a finding that Bear Stearns breached its obligation under its professional liability insurance policies to obtain the consent of its insurers before settling any claims in excess of $5,000,000.00.

Bear Stearns reached a “settlement in principle” in December, 2002. In April, 2003, Bear Stearns signed an agreement that still required court approval before the it could take effect. Three days later, Bear Stearns notified its insurers of the agreement and asked for their consent. The insurers denied coverage, and despite the fact that the New York trial court found the settlement to be “fair, adequate, and in the public interest,” and the relevant policy provided that the insurers’ consent could not be unreasonably withheld, New York’s highest court declared that Bear Stearns had clearly and knowingly breached the policy provision and the insurers did not have to pay.

This case highlights the pitfalls of not being mindful of insurance coverage during litigation and failing to keep the insurers in the loop. Many policies specify that New York law governs coverage matters, even London and Bermuda policies, so the effect of this case can be far reaching. It is always a good idea to have a coverage lawyer on call.