The insurer of the Primary Policy, U.S. Specialty Insurance Company, acknowledged coverage and advanced defense fees and costs until the limit of the Primary Policy was exhausted.

Similarly, the first layer of excess coverage, provided by Berkshire Hathaway Specialty Insurance Company, was exhausted.

The insurers responsible for the final three layers of excess coverage – Freedom Specialty Insurance Company, Atlantic Specialty Insurance Company, and Berkley Specialty Insurance Company (collectively, the "Excess Insurers") – disclaimed coverage and filed a declaratory judgment action seeking to have the Excess Policies declared void (1) for breach of warranty statements falsely representing on their applications for coverage that they were unaware of any wrongful act of any insured that might result in a claim being made against any of them, and (2) for breach of the "Prior or Pending Demand or Litigation Exclusion" (the "PPL Exclusions") clauses, which precluded coverage for claims arising out of any litigation that was pending as of November 15, 2015 (the start of the policy period).

The Insureds sought a preliminary injunction directing the Excess Insurers to advance their attorneys' fees and costs for defense of the Indictment, the SEC Complaint, and the Harris County Action.

They contended that, absent an immediate injunction directing the Excess Insurers to honor their advancement obligations, they would be without coverage for their defense costs at a critical juncture in the criminal proceeding. They argued that their defense of the Indictment was suffering, including from an inability to retain expert witnesses whose testimony was essential to refuting the government's allegations concerning the sophisticated financial transactions at issue in the case.

The Insureds argued that the Excess Insurers' declaratory judgment action sought to establish the truth of the allegations in the Indictment and the SEC Complaint as a basis for avoiding coverage – even though they had denied the charges and allegations and no wrongdoing had been found in either case.

The Insureds asserted that, if accepted, the Excess Insurers' arguments would make D&O coverage all but meaningless in any case alleging wrongdoing against a corporate officer.

The Court's Decision

The court granted the Insureds' motion.

In its decision, the court explained that the law in New York regarding interpretation of exclusionary clauses contained in D&O policies was "highly favorable to insureds," and that any policy exclusions must "have a definite and precise meaning, unattended by danger of misconception . . . and concerning which there is no reasonable basis for a difference of opinion."

Moreover, the court continued, under a directors and officers liability policy calling for the reimbursement of defense expenses, "insurers are required to make contemporaneous interim advances of defense expenses where coverage is disputed, subject to recoupment in the event it is ultimately determined no coverage was afforded."

Here, the court found, the Insureds had "shown a likelihood of success on the merits." The court noted that the Insureds had not been found guilty of any of the charges contained in either the Indictment or the SEC Complaint. The court then stated:

Until there has been a final adjudication of wrongdoing by the Insureds, the Excess Policies remain in effect and the Excess Insurers are required to pay the legal defense costs of their insureds.

The court added that the Insurers had not demonstrated that the Insureds had breached any warranty or that the PPL Exclusion was applicable.

In the court's view, the Insureds had "persuasively" argued that they faced irreparable harm without advancement of defense costs, and that the balance of hardships tipped "decidedly in their favor."

The court reasoned that, without preliminary injunctive relief, the Insureds would be irreparably harmed because they would be unable to mount adequate defenses, particularly in the criminal proceedings, where, according to the Insureds, the government had produced approximately 15 million pages of documents with discovery still ongoing and the Insureds were in need of funds to pay for the expert witnesses and consultants that were essential to their defense.

The court concluded that the harm that the Insureds might suffer stemming from being unable to adequately defend themselves, including potentially losing their liberty, outweighed any possible economic loss that the Excess Insurers might experience, and it granted the Insureds' motion for a preliminary injunction and ordered the Excess Insurers to pay the legal expenses in both the criminal and civil proceedings brought against the Insureds as they accrue and in accordance with the layers set forth in the policies, subject to recoupment up to the policy limits, until final adjudication that their alleged wrongdoings fell within policy exclusions.

The case is Freedom Specialty Ins. Co. v. Platinum Management (NY), LLC, No. 652505/2017 (N.Y. Sup.Ct. N.Y. Co. Dec. 21, 2017).