Insurer Required to Defend Directors and Officers Against Ponzi Claims

Pendergest-Holt v. Certain Underwriters at Lloyd's of London

(S.D. Tex. January 26, 2010)

 

The directors and officers of a corporation were indicted for involvement in an alleged Ponzi scheme, and the Securities and Exchange Commission commenced a civil action alleging that the insureds conspired to deceive investors and sold sham certificates of deposits ("CDs").  As an initial matter, the Court noted that the policy's Fraud Exclusion could not be a valid basis for the insurer's refusal to pay defense costs because the Fraud Exclusion explicitly requires a "final adjudication" that Plaintiffs committed a "fraudulent or criminal act" before relieving the insurer of defense obligations.

 

The insurer disclaimed coverage and the duty to defend based upon a Money Laundering Exclusion.The Money Laundering Exclusion does not explicitly state that a "final adjudication" must be made. Rather, that exclusion provides that allegations of money laundering will preclude payments when "it is determined that the alleged act or alleged acts did in fact occur." Underwriters contend this "in fact" determination is Underwriters' decision to make. The insurer insisted that because the government's case turned on allegations of money laundering, and one of the directors made a plea allocution admitting the fraud, the exclusion was applicable.

 

The court rejected the insurer's argument and held that the duty to defend was determined by the complaint and the policy (the "eight corners" test). The Court held that the determination of "in fact," "may mean something less than a judicial determination but also may mean much more than an insurer's own determination based on nothing more than mere allegations supplemented by the self-serving statements of an indicted co-defendant who elects to plead guilty and cooperate with the prosecution."  It therefore enjoined the insurer from denying a defense.

 

Please click here for a copy of the case.  Case provided courtesy of Lexis.

 

Sarah Delaney and Sharon Angelino

 

https://www.goldbergsegalla.com/attorneys/Delaney.html

https://www.goldbergsegalla.com/attorneys/Angelino.html