February 3, 2010
Written By Attorneys: Claudia D. McCarron and Paulyne A. Gardner-Smith
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
The United States District Court for the Southern District of Texas recently granted a preliminary injunction in favor of five Stanford Financial executives, requiring their D&O and excess insurers to defend them in the criminal and civil lawsuits pending against them. Although the Court did not make any final decisions as to coverage, the ruling provides an example of how D&O policies may be required to respond in the wake of the United States financial banking and mortgage crisis.
In Pendergest-Holt, et al v. Certain Underwriters at Lloyd's of London, et al, 2010 WL 317684, slip op. (S.D. Tex. Jan. 26, 2010), Plaintiffs Robert Allen Stanford, Chairman of the Board of Directors of Stanford International Bank, Ltd., and four other executives, filed a declaratory judgment action against their D&O and excess insurers, Lloyd's of London and Arch Specialty Insurance, after the insurers retroactively declined coverage. The five executives had sought coverage for the payment of attorneys fees incurred in defending themselves from civil and criminal lawsuits filed by the SEC and the federal government, alleging that the five had engaged in a multi-billion dollar ponzi scheme and committed obstruction of justice, conspiracy to commit mail fraud, wire fraud, securities fraud and money laundering.
The executives requested a preliminary injunction requiring the payment of attorneys fees and costs by the insurers until a decision was made on the coverage issue.
At issue was the money laundering exclusion, which precludes payment where "it is determined that the alleged act or acts did in fact occur." The insurers took the position that various affidavits and evidence submitted to the SEC, along with the entry of a temporary restraining order, appointment of a receiver, and the findings upon entry of a separate preliminary injunction, supported their determination that Plaintiffs had engaged in money laundering.
The executives argued, and the Court agreed, that the insurers' reliance on extraneous evidence, outside the language of the complaint and the policy, was improper. According to the Court, to hold otherwise would allow an insurer to act "as judge and jury and convict its own insureds, thus avoiding any further financial responsibility for the insureds' defenses." Without the ability to rely on extraneous evidence to prove the fault of the executives, the Court found that the executives were likely to succeed on their argument that the insurers were contractually obligated to pay defense costs until a final adjudication on the underlying civil and criminal charges was reached, notwithstanding the fact that the policy language seemed to invite a determination of fact. The Court granted the Preliminary Injunction.
At its very minimum, the decision supports the conclusion that insurers will continue to play an important role as the country begins its recuperation from the financial banking and mortgage crisis.
