A New York court of Appeals held that a wrongful act liability policy covered funds that the insured disgorged as part of a settlement with the Securities and Exchange Commission. The settlement payment was not excluded from insurance coverage as a “penalty imposed by law” under the policies.
The policy provided coverage for “loss” that the insured became liable to pay in connection with any civil proceeding or governmental investigation into violations of laws or regulations. Loss included various types of damages – including compensatory and punitive damages (where insurable by law) – but not “fines or penalties imposed by law”. The insured had agreed as part of the settlement to pay $160 million to disgorge profits earned (but not received by the insured) by facilitating late trading and deceptive market-timing activities. The insured was a securities broker-dealer that processed and cleared trades for clients. They also paid $90 million for “civil money penalties” which the insured did not dispute was uninsured.
The phrase “penalties imposed by law” was not defined in the policies. The term “penalty” is commonly understood to refer to a monetary sanction designed to address a public wrong that is sought for the purposes of deterrence and punishment rather than to compensate injured parties for their loss. This is also consistent with dictionary definitions. A penalty is usually imposed without reference to the actual damage sustained. A penalty is distinct from a compensatory remedy and is not measured by the losses caused by the wrongdoing. The $140 million disgorgement payment was based on wrongfully obtained profits and was contrasted with the $90 million penalty. Both parts of the settlement were placed in a fund to compensate injured parties. It was therefore compensatory and not a penalty and therefore insured.