First Department Affirms Allocation of Remainder of Defense Cost Coverage to Tyco Defendants

D&O – WRONGFUL ACTS – ALLOCATION OF DEFENSE COSTS
Federal Ins. Co. v. Tyco Intl. Ltd.
(1st Dept., decided 12/18/2008)

Federal commenced this interpleader action to resolve competing claims for proceeds of an Executive Protection Policy that Federal had issued on behalf of defendant Tyco International, Ltd. (“Tyco”) and its officers and directors. The remaining claimants -- Tyco, defendant Mark Belnick, and defendant Frank E. Walsh, Jr. -- were seeking reimbursement for defense costs they had incurred in numerous civil and criminal proceedings. 

Federal had paid a total of $20,710,664 out of the $25 million policy limit for Executive Liability and Indemnification coverage to Tyco and Belnick for defense costs.  Federal then moved for an order discharging it after it paid the remaining $4,289,336 of ELI Coverage to defendants as directed, or deposited that amount into court.

Walsh moved for an order granting him partial summary judgment and declaring that he was entitled to receive all of his defense costs, both past and future, from the remaining policy proceeds in connection with about sixteen civil proceedings. The underlying lawsuits included this interpleader action and an action in which Federal sought rescission of the policy.  In addition, Walsh sought a declaration that Federal was obligated to defend him in an underlying ERISA action pursuant to the “Fiduciary Coverage” that the Federal policy provided in addition to its ELI Coverage.  In opposition, Tyco argued that it was entitled to the entire balance of the policy's proceeds after Belnick was paid, and contended that Walsh’s felony conviction for violating New York's Martin Act for not disclosing a $20 million finder's fee he received from Tyco for brokering its acquisition of the CIT Group, Inc., barred him from ELI Coverage. Tyco further argued that, in any event, Walsh lost his  priority for his claims by submitting his invoices to Federal well after Tyco had begun to submit its invoices.

Tyco and Walsh agreed that of the remaining $4,289,336 in policy proceeds, Belnick was entitled first to payment of $987,261 for his defense costs, leaving $3,302,075 in ELI Coverage, which Tyco claimed Walsh was not entitled to, based on a policy exclusion for “fraud”:

based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by such [insured person], if a judgment or other final adjudication establishes such a deliberately fraudulent act or omission or willful violation.

In granting Walsh's motion, in part, New York Supreme ruled (2007 NY Slip Op 30924[U][Sup. Ct., New York Co., decided 4/23/2007]) that the general principle of “first in time, first in right” does not preclude a court from exercising its equitable power when apportioning insurance proceeds among claimants in an interpleader action, and that full payment to Walsh would reflect the intent of the policy's priority provision to give the claims of Tyco officers and directors priority over those of the company.

The First Department AFFIRMED the order appealed from, holding:

Outside director Walsh's violation of the Martin Act did not bar his recovery of defense costs under the Federal Insurance directors and officers liability insurance obtained by Tyco. Strictly construing the policy exclusions (see Belt Painting Corp. v TIG Ins. Co., 100 NY2d 377, 383 [2003]) and according meaning to each of their terms (see Beal Sav. Bank v Sommer, 8 NY3d 318, 324 [2007]), the motion court correctly interpreted the exclusions of claims "based on, arising from, or in consequence of" a wrongful act, rather than the language of "interrelated" and explicitly "causally connected" wrongful acts contained in the limit on liability section of the coverage provisions, in finding that there are civil claims against Walsh that are not covered and civil claims against him that are covered. Walsh's conduct represents only a portion of the acts for which liability is sought to be imposed and was of a different character from that of most of the wrongs alleged in the actions against the corporation, its executives, its accountants and some of its directors. 

In equitably distributing the policy proceeds, the court correctly found that the policy gives priority to the claims of "insured persons" over those of the insured corporation, properly considered the corporation's access to excess coverage, and properly declined to consider the order in which the insureds submitted their defense bills (see Agricultural Ins. Co. v Matthews, 301 AD2d 257, 260 [2002]).