Chubb Unit Must Pay Tyco CEO Defense

By Daniel Hays

NU Online News Service, March 25, 10:07 a .m. EST?Federal Insurance Company must continue paying defense bills for Dennis Kozlowski, the former Tyco chief executive on trial in New York for stealing millions from his company, an appeals court has ruled.[@@]

However, the New York Appellate Division Court in New York, in upholding a lower court ruling, also found the insurer may get the money back later if it succeeds in a legal proceeding to rescind the policy.

A spokesman for Federal's parent, the Warren, N.J.-based Chubb Group, had no immediate reaction to the unanimous decision Tuesday by a five-judge panel. William Passanante of Anderson Kill & Olick, who represented Mr. Kozlowski could not be reached for comment.

Mr. Kozlowski's criminal trials have drawn heavy media coverage over the alleged use of company monies to help pay for a $2 million Roman-themed birthday party for his wife on the island of Sardinia.

In addition to his criminal trial, Mr. Kozlowski has legal expenses to defend against suits on behalf company employees in the Tyco pension plan and Tyco stockholders.

The pension plan action alleges Mr. Kozlowski misrepresented and hid information about plan asset management and allowed it to buy Tyco stock when "it was imprudent to do so," and misrepresented information in Securities and Exchange Commission filings.

Stockholders alleged the former CEO's statements led them to buy the stock at "excessive prices."

Prosecutors claim Kozlowski, 58, and Mark Swartz, 44, the former Tyco chief financial officer, gave themselves and others $150 million in unauthorized compensation including loans and bonuses. Besides grand larceny, the 31 charges against them include falsification of business records and securities fraud.

A mistrial ended the first criminal case against the two last April.

The appeals court noted that Federal only moved to rescind the executive liability and indemnification and fiduciary liability coverage in February 2003, "approximately nine months after notice of dozens of lawsuits?"

Federal claimed it issued its policies based on misleading information in the Tyco annual report, but the Appellate Division found there were policy provisions that keep the insurer from attributing information to Mr. Kozlowski that comes from others in the company, and found Federal had not shown he had "directly or indirectly misrepresented facts" to have them issue the policy.

However, the court also found that while "Federal must pay defense costs as they are incurred in the securities action and the criminal proceeding, its ultimate liability for such costs" is only for those that do not involve misdeeds for personal profit.

Federal's payments, the court added, are "subject to recoupment when [Mr.] Kozlowski's liabilities, if any, are determined."

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Chubb Unit Must Pay Tyco CEO Defense

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