## Facts

- Bear, Stearns & Co. Inc. and related entities (later succeeded by J.P. Morgan Securities Inc.) purchased professional liability policies covering “loss” arising from “wrongful acts,” subject to exclusions including “fines or penalties imposed by law.”
- The SEC investigated Bear Stearns for conduct involving “late trading” and “market timing” in mutual funds and alleged violations of federal securities laws.
- In 2006 Bear Stearns consented to an SEC order requiring payment of $160 million labeled “disgorgement” and $90 million labeled “civil penalties,” deposited into a distribution fund for affected mutual fund investors.
- Bear Stearns paid $250 million and sought insurance coverage for the $160 million “disgorgement” amount.
- Insurers moved to dismiss under CPLR 3211, arguing the $160 million was not a covered “loss” and was an uninsurable penalty/restitution; the trial court denied dismissal, the Appellate Division reversed and dismissed, and the Court of Appeals reviewed.

## Issues

1. Whether the insureds’ claim for coverage of the $160 million SEC “disgorgement” payment could be dismissed at the pleading stage as an uncovered penalty/restitution rather than a covered “loss.”
2. Whether insurers established, on a CPLR 3211 motion, that the claim fell wholly within the exclusion for “fines or penalties imposed by law.”

## Decision

- The Court of Appeals reversed the Appellate Division and reinstated the complaint.
- Accepting the complaint’s allegations as true and giving plaintiffs favorable inferences, the court held insurers were not entitled to CPLR 3211 dismissal.
- The court ruled insurers did not conclusively establish, as a matter of law, that the entire $160 million payment was an uninsurable penalty or restitution.
- The court further ruled insurers did not show the “fines or penalties imposed by law” exclusion clearly and unambiguously applied to the $160 million payment at the pleading stage.
- The case was remitted for further proceedings on a fuller record; the court did not decide ultimate coverage.

## Legal Principles

- On a CPLR 3211 motion, courts accept pleaded facts as true, draw all reasonable inferences for the plaintiff, and determine only whether the allegations state a legally cognizable claim.
- An insurer seeking dismissal based on an exclusion bears the burden to show the exclusion applies in clear and unmistakable language; exclusions are construed narrowly.
- A payment labeled “disgorgement” is not automatically treated as an uncovered penalty or uninsurable restitution at the pleading stage; characterization can depend on how the amount was calculated, who benefited, and whether the payment functioned to compensate third parties rather than return the insured’s own gains.
- Public-policy objections to insuring disgorgement are not resolved categorically on a sparse record where it is not conclusively shown the payment represents the insured’s own ill-gotten gains.

## Conclusion

The court held that, at the motion-to-dismiss stage, insurers failed to negate coverage as a matter of law for the insureds’ claim seeking indemnity for an SEC-ordered payment labeled “disgorgement,” so the coverage action could proceed.


J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 992 N.E.2d 1076 (N.Y. 2013)