Kara Altenbaumer-Price and Amy Elizabeth Stewart on “Ponzi Schemes, and Money Laundering, and Defense Costs! Oh My!”

   By Kara Altenbaumer-Price and Amy Elizabeth Stewart

In “Ponzi Schemes, and Money Laundering, and Defense Costs! Oh My!,” by Kara Altenbaumer-Price and Amy Elizabeth Stewart, appearing in the September/October 2010 issue of Coverage, the authors examine Directors and Officers coverage issues stemming from the criminal and civil proceedings against R. Allen Stanford and other executives of the Stanford Financial entities for a Ponzi scheme resulting in a reported $7 billion in investment losses.  The D&O insurers ceased paying advance defense costs on the basis of the policies’ broadly written money laundering  exclusion. The insureds then sued the D&O insurers seeking damages, a declaration that their defense costs must be reimbursed under the policies, and a preliminary injunction ordering the insurers to continue paying defense costs until a final judgment on the merits of the coverage dispute. With respect to alleged acts of money laundering, the policies provided that defense costs are to be covered “until such time that it is determined that the alleged act or alleged acts did in fact occur.”  The parties disagreed on the meaning of the “determining in fact”—who makes the “determination” and when it may be made. On appeal, the Fifth Circuit held in Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 600 F.3d 562 (5th Cir. 2010) [enhanced version available to lexis.com subscribers /  unenhanced version available from lexisONE Free Case Law], that the policies allowed for an advance judicial termination on coverage issues. The authors analyze that decision and the pertinent consequences of an earlier, ancillary coverage lawsuit that overlapped this issue in an ongoing criminal proceeding. The authors conclude by recommending careful policy drafting to avoid such complications including (inter alia) that the insureds:

•   seek to include final adjudication language in all conduct exclusions;

•   have the policy clearly express the circumstances, if any, under which the insurer may decide unilaterally to stop advancing defense costs;

•   avoid broad conduct exclusions; and

•   have the policy impute conduct between as few individuals as possible and between as few individuals and the organization as possible.

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Kara Altenbaumer-Price, J.D., is Director of Complex Claims & Consulting for USI, the largest privately-held broker of commercial insurance in the United States. Kara works in USI's Management & Professional Services group, where she consults with USI's director & officer insurance and other management liability clients on issues related to corporate governance, private securities litigation, and regulatory securities enforcement. She is summa cum laude graduate of Texas Tech University School of Law.
 
Amy Elizabeth Stewart is a shareholder with Amy Stewart PC, where she focuses her practice on insurance coverage and bad faith litigation with an emphasis on specialty liability policies, including directors & officers liability, fiduciary liability, errors & omissions, securities broker/ dealers liability, architects and engineers liability, employment practices liability and other professional liability policies. After representing insurers exclusively for most of her career, Amy now devotes most of her practice to the representation of policyholders in coverage disputes. Amy is AV-rated by Martindale-Hubbell and a graduate of The University of Virginia School of Law.