Reed Smith LLP on Applying Eight Corners Rule to Defense Costs Advancement in Pendergest-Holt v. Certain Underwriters’ At Lloyd’s Of London

Reed Smith LLP on Applying Eight Corners Rule to Defense Costs Advancement in Pendergest-Holt v. Certain Underwriters’ At Lloyd’s Of London

   By John Berringer and Jill Averett, Reed Smith, LLP

On March 15, 2010, the Fifth Circuit affirmed the decision of the U.S. District Court for the Southern District of Texas, PENDERGEST-HOLT V. CERTAIN UNDERWRITERS’ AT LLOYD’S OF LONDON, 2010 U.S. App. LEXIS 5384 (5th Cir. Tex. Mar. 15, 2010), at the preliminary injunction stage ordering Lloyd’s of London underwriters to immediately commence the advancement of defense costs despite an exclusion which was arguably triggered by the misconduct of the policyholder’s officers.

The underlying actions involved an alleged Ponzi scheme orchestrated by R. Allen Stanford and the Stanford Financial Group.  The $100 million directors and officers liability policy covering Stanford contained an advancement of defense cost provision.  The directors and officers liability policy also contained a money laundering exclusion barring coverage for loss when “it is determined” that such acts did “in fact” occur.  A former CFO of the Sanford Financial Group pled guilty in one of the underlying actions to acts which Underwriters argued fell under the policy’s broad definition of money laundering.

Based on that plea, Underwriters made the unilateral determination that the exclusion applied and stopped advancing defense costs.  Ultimately, the U.S. District Court for the Southern District of Texas ruled that there is no reason to treat a duty to advance defense costs differently from a duty to defend and thus applied the "eight corners" rule.  In doing so, the judge disregarded the extrinsic evidence - -the guilty plea -- relied on by Underwriters.

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John Berringer is a partner in Reed Smith, LLP’s New York office and a litigator who has represented clients in a broad variety of practice areas, including environmental, product liability and directors and officers insurance coverage litigation, contract, bankruptcy and employment litigation. He has written articles and lectured extensively on insurance coverage issues. John has been recognized, for the third year in a row, by Chambers USA 2009: America’s Leading Lawyers for Business as a "'real team player' who is known for his extensive knowledge and experience in representing clients in insurance coverage and bankruptcy cases.” In addition, Chambers USA recognizes John by saying "Berringer is held to be one of the regions foremost authorities on insurance matters, with expertise across a wide range of issues." John has been rated "AV" by Martindale Hubbell.

Jill Averett is an insurance recovery associate in Reed Smith, LLP’s New York office.

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