News & Events
Skarzynski Marick & Black Wins Summary Judgment on Insured Capacity and Uninsurability of Disgorgement
Skarzynski Marick & Black attorneys Alexis Rogoski, Ted Carleton and Juan Luis Garcia, representing Freedom Specialty Insurance Company, along with other non-settling excess
insurers, obtained favorable rulings on summary judgment in the New York State Supreme Court for the County of New York.
The insurance at issue concerned a $50 million tower of Directors and Officers (D&O) insurance issued to AR Capital, LLC (“AR Capital”). The coverage dispute involved claims for indemnification for a portion of a securities class action settlement and SEC consent decrees relating to VEREIT, Inc. (“VEREIT”), a large conglomeration of real estate investments, organized as a publicly held and traded real estate investment trust. AR Capital, through wholly owned subsidiaries, sponsored and managed VEREIT. In addition, various members and managers of AR Capital were also directly appointed officers of VEREIT.
On February 2, 2021, the New York Supreme Court granted the insurers’ motions for summary judgment, agreeing that coverage was not available for the AR Capital parties under the AR Capital insurance program. A copy of the decision is available here.
The Court’s decision was premised on two principal findings. First, the Court agreed with the insurers that the policies only insured conduct by AR Capital’s managers in their capacity as managers of AR Capital, and not in capacities as external managers of VEREIT or directors and officers of VEREIT. With respect to the securities class actions, the Court determined that the insureds’ exposure under Section 11 of the 1933 Securities Act arose from registration statements signed by the individuals “in their capacities as directors and officers of VEREIT, not AR Capital.” Similarly, the Court concluded that Nicholas Schorsch’s exposure under Section 10(b) of the 1934 Securities Act and Rule 10b-5 was based on his statements and representations made in SEC filings in his capacity as CEO of VEREIT. With respect to the derivative actions, the Court held that the insureds were sued for breaches of their fiduciary duties “as members of VEREIT’s Board of Directors, not AR Capital.” The Court’s findings were buttressed by an outside capacity exclusion.
Second, the Court held that the SEC consent decrees were not subject to indemnification because disgorgement is not insurable as a matter of New York’s public policy. The Court rejected the insureds’ efforts to distinguish J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., 166 AD3d 1, 8 (1st Dept 2018). Quoting J.P. Morgan, the Court agreed that disgorgement is a “punitive sanction intended to deter” and allowing indemnification for disgorgement “violate[s] the fundamental principle that no one shall be permitted to take advantage of his own wrong.”
insurers, obtained favorable rulings on summary judgment in the New York State Supreme Court for the County of New York.
The insurance at issue concerned a $50 million tower of Directors and Officers (D&O) insurance issued to AR Capital, LLC (“AR Capital”). The coverage dispute involved claims for indemnification for a portion of a securities class action settlement and SEC consent decrees relating to VEREIT, Inc. (“VEREIT”), a large conglomeration of real estate investments, organized as a publicly held and traded real estate investment trust. AR Capital, through wholly owned subsidiaries, sponsored and managed VEREIT. In addition, various members and managers of AR Capital were also directly appointed officers of VEREIT.
On February 2, 2021, the New York Supreme Court granted the insurers’ motions for summary judgment, agreeing that coverage was not available for the AR Capital parties under the AR Capital insurance program. A copy of the decision is available here.
The Court’s decision was premised on two principal findings. First, the Court agreed with the insurers that the policies only insured conduct by AR Capital’s managers in their capacity as managers of AR Capital, and not in capacities as external managers of VEREIT or directors and officers of VEREIT. With respect to the securities class actions, the Court determined that the insureds’ exposure under Section 11 of the 1933 Securities Act arose from registration statements signed by the individuals “in their capacities as directors and officers of VEREIT, not AR Capital.” Similarly, the Court concluded that Nicholas Schorsch’s exposure under Section 10(b) of the 1934 Securities Act and Rule 10b-5 was based on his statements and representations made in SEC filings in his capacity as CEO of VEREIT. With respect to the derivative actions, the Court held that the insureds were sued for breaches of their fiduciary duties “as members of VEREIT’s Board of Directors, not AR Capital.” The Court’s findings were buttressed by an outside capacity exclusion.
Second, the Court held that the SEC consent decrees were not subject to indemnification because disgorgement is not insurable as a matter of New York’s public policy. The Court rejected the insureds’ efforts to distinguish J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., 166 AD3d 1, 8 (1st Dept 2018). Quoting J.P. Morgan, the Court agreed that disgorgement is a “punitive sanction intended to deter” and allowing indemnification for disgorgement “violate[s] the fundamental principle that no one shall be permitted to take advantage of his own wrong.”