In Federal Ins. Co. v. Kozlowski, 2005 WL 646497 (N.Y.A.D. 1 Dept. Mar. 22, 2005), a New York court ruled that an executive liability insurer was required to defend an insured for an ERISA action and pay defense costs for a securities action and a criminal prosecution.
L. Dennis Kozlowski, former Tyco CEO, faced civil actions regarding his management of employee benefit plans and violations of security laws and rules. Criminal charges alleging theft of Tyco assets and falsifying business records and concealing and distorting material information were also brought against him. He looked to his insurer, Federal Insurance Company, for defense.
Federal issued a series of Executive Protection policies to Tyco to protect its officers and directors. The fiduciary liability portion of the policy provided a duty to defend provision, and the executive liability and indemnification portion contained provisions for the insurer to pay defense costs.
Federal rescinded the policy due to material misrepresentations and omissions made by the insured at the time coverage was issued. Federal claimed that it relied on Tyco's 10-K statements filed with the SEC, which Federal alleged contained misrepresentations about such items as loans, compensation, and accounting practices. It returned Tyco's premiums for the rescinded policy.
The court said that the policy “contains a severability provision that precludes Federal from imputing to Kozlowski statements or knowledge of other insureds. Thus, Federal must show that Kozlowski participated, directly or indirectly, in misrepresenting facts to induce Federal to issue the policy.” The court said that Federal did not meet that burden.
Federal chose to rescind the policy after it had been in effect for almost two years and claims had been made. Thus, the court said, “In such circumstances, a rescission by notice cannot, without legal sanction, have retroactive effect and serve to suspend, even temporarily, obligations that—absent a basis for rescission—have accrued under the policy.”
The court said that the rescission issue must await judicial determination and ruled on Federal's duty to indemnify and pay defense costs. Federal pointed to an exclusion in the policy for claims based on personal profit to which the insured was not entitled. However, the court stated that not all of the claims against Kozlowski allege that he personally profited from the activities. The court said that the claims encompass both covered and excluded activities and that the “requirement is clear—the insurer must afford a defense to the insured for covered as well as non-covered claims.”
The obligation for paying defense costs, though, is not as clear. Here, the court said, the insurer is permitted to distinguish between covered and noncovered claims. But, because an allocation between covered and noncovered claims could not be made at this juncture, the court found that Federal must pay defense costs as they are incurred until such determination is made.