The opinion of the court was delivered by: Sweet, D.J.
Carl H. Loewenson, Jr., Esq., the court appointed receiver in the
above-captioned action (the "Receiver") has moved under Rule 56,
F.R.Civ.P., to dismiss certain of the affirmative defenses asserted by
the Insurers in the answer. This third party action was initiated by
the Receiver on February 23, 2000 against third-party defendants,
Certain Underwriters at Lloyd's ("Lloyd's"); London Market Companies;
and Gulf Insurance Company ("Gulf") (collectively the "Insurers").
The Insurers have cross-moved for summary judgment on the affirmative
defenses, and other grounds, as described herein. By separate motion
of July 26, 2000, which was deferred for consideration in connection
with the instant motions, the Receiver sought a declaratory judgment that
he is not required to make a second premium payment on two of the policies
at issue. The Insurers have cross-moved to dismiss all claims under either
policy since the payment was not timely made.
On the findings and conclusions set forth below, the Receiver's motion
is granted in part and the Insurers' motion is denied.
Certain of the proceedings in this action which preceded the filing of
the instant motions are set forth in the prior opinions of this Court,
familiarity with which is presumed. See SEC v. Credit Bancorp, Ltd.,
194 F.R.D. 457 (S.D.N.Y. 2000).
On November 17, 1999, the primary action was initiated by the
plaintiff, Securities and Exchange Commission (the "SEC") to freeze the
assets of Credit Bancorp, Ltd. and its related entities (collectively,
"CBL") upon the allegations that Richard Jonathan Blech ("Blech") and
others had engaged in a complex securities fraud. The fraud affected over
200 customers with interests exceeding $200 million. An equity
receivership was established on January 21, 2000. The Receiver marshalled
the assets and is in the process of effecting a plan of partial
distribution (which is in essence a pro rata return of customer-deposited
property of the CBL customers, either in the form of deposited property,
i.e. securities, or in the form of cash or replacement securities)
pursuant to the opinions of November 29, 2000, SEC v. Credit Bancorp
Ltd., 2000 WL 1752979 (S.D.N Y January 19, 2001), SEC v. Credit Bancorp
Ltd., 129 F. Supp.2d 259 (S.D.N.Y.), and orders of January 19, 2001 and
May 16, 2001.
In the London Insurance market, a lead underwriter sets the terms of
the policy and premiums, and is responsible for the administration of the
policies, including the addition of endorsements or modifications to the
policy and claims handling. The rest of the insurers who subscribe to
a policy besides the lead, whether as part of the line slip or
independently, are referred to as the following market. Members of
the following market tend to rely on the underwriting, administration
and claims handling of the leader. Marsh, Inc. ("Marsh") is the
broking division of Marsh & McLennan Companies. Marsh's London
affiliate is a Lloyd's broker licensed by Lloyd's to place insurance
in the London insurance market. All of CBL's policies that are
relevant to this action were brokered by Marsh.
The policies at issue in this coverage action as of November of 1999 are
Lloyd's and Gulf sold CBL a primary policy bearing policy number
509/QA472597 (the "Primary Policy") for the period November 1, 1997 through
April 1, 2001. The Primary Policy is described as a "blended" policy, and
combines various standard forms used in the London insurance market. It
provides an aggregate of $10 million in insurance and is divided into
three sections. Payment of a single premium on a multi-year Primary Policy
is the common practice at Lloyd's.
Section 1(A) of the Primary Policy provides "Comprehensive Crime"
coverage under a Bankers Blanket Bond. The fidelity portion of Section
UNDERWRITERS hereby undertake and agree, subject to the
following terms, exclusions, limitations and
conditions, to make good to the Assured . . . such
direct financial loss sustained by the Assured
subsequent to the Retroactive Date [November 1, 1997]
and discovered by the Assured during the period of the
Policy and subject always to the Policy Limits as
stated in the Schedule.
INSURING CLAUSE I
. . . [I]t is agreed that with regard to trading or other
dealings in securities, commodities, futures, options,
currencies foreign exchange and the like, and loans,
transactions in the nature of a loan or other extensions
of credit, this Policy covers only loss resulting solely
and directly from the dishonest or fraudulent acts by
Employees of the Assured committed with the intent to
make and which result in improper financial gain for
themselves other than salary, fees, commissions,
promotions or other similar emoluments.
Upon discovery of a loss during the policy period, the Primary
Policy requires notice of the loss be provided to the Insurers:
As a condition precedent to their right to be
indemnified under this Policy, the Assured shall . . .
within 30 days after discovery by the Assured of any
loss hereunder, give written notice thereof to Underwriters.
Thus, under Section 1(A), coverage is provided for losses sustained
after the retroactive date of November 1, 1997 and discovered during the
policy period, provided that notice is given within thirty days of the
Section 2 of the Primary Policy provides insurance for losses arising
from professional malpractice claims ("E&O"):
Underwriters shall reimburse the Assureds for Loss
resulting from any Claim first made during the Policy
Period for a Wrongful Act in connection with the
performance of Professional Services.
The term "Wrongful Acts" is defined in the E&O Section as: "any actual
or alleged error, omission, or negligent act in rendering or failing to
render professional services." Exclusion E provides:
Underwriters shall not be liable for loss . . .
E. brought about or contributed to in fact by any dishonest,
fraudulent or criminal act or omission by any of the
Assureds, . . . provided, however, no Wrongful Act
shall be imputed due to any other person for the
purpose of determining the applicability of Exclusion E.
Section 3 of the Primary Policy provides Directors and Officers and
Company Reimbursement coverage ("D&O"). Insuring Clauses A and B provide:
A. Underwriters shall pay on behalf of the Directors
and Officers Loss resulting directly from any Claim
first made during the policy Period for a Wrongful Act.
B. Underwriters shall pay on behalf of the Company any
Loss which the Company pays as indemnification to any
of the Directors and Officers resulting from any claim
first made during the Policy Period for a Wrongful Act.
"Wrongful Act" is defined as "any actual or alleged error, omission,
misstatement, misleading statement, neglect, breach of duty or negligent
act by any of the directors or officers, while acting solely in their
capacity as a director or officer of the Company."
Exclusion G bars coverage for claims:
brought about by or contributed to in fact by any dishonest,
fraudulent or criminal act or omission, or any personal
profit or advantage gained by any of the Directors and
Officers to which they are not legally entitled.
No Wrongful Act shall be imputed to any other person for
the purpose of determining the applicability of Exclusion G.
2. The First Excess Crime Policy
The First Excess Crime Policy, 509/QA474097, also sold to CBL by
Lloyd's and Gulf, provides $40 million in coverage excess of Section 1 of
the Primary Policy (the "First Excess Crime Policy") and covers the
period from November 1, 1997 to April 1, 2001. It is a "follow form"
policy which incorporates the terms and conditions of Section 1 of the
Primary Policy and provides exactly the same coverage as the primary
comprehensive crime coverage. Like the Primary Policy, this policy
contains a clause which renders the policy void if a "false or
fraudulent" claim is filed. The Gulf Insurance Company policy is
subject to the same terms and conditions and follows form as to the
The underwriting of the First Excess Crime Policy was accomplished in
conjunction with the underwriting of the Primary Policy and Lance
Dalzell-Piper was the individual underwriter at D.P. Mann who acted as
the lead underwriter. The syndicates on the Marsh line slip that
subscribed to the Primary Policy also bound themselves, along with Gulf
(US), to the First Excess Crime Policy.
3. The Second Excess Crime Policy
The Second Excess Comprehensive Crime Policy, 509/QA539299, provides
$150 million in insurance excess of the $40 million First Excess Crime,
which in turn is excess of Section 1 of the Primary Policy (the "Second
Excess Crime Policy") and covers the period from April 22, 1999 to April
1, 2001. It is also a "follow form" policy, incorporating the terms and
conditions of Section 1 of the Primary Policy "as far as applicable."
The Second Excess Crime Policy incorporates certain terms and
conditions of Section One of the Primary Policy. Section One of the
Primary Policy contains the following language:
(a) General Condition 1(a) provides:
This policy should immediately cease to afford any cover
of any kind in the event of the liquidation (voluntary or
compulsory) of the Assured, or the appointment of a
Receiver or Manager, or the entering into any Scheme of
arrangement or compensation with creditors.
(b) General Condition 2 provides):
In the event of a takeover/merger, all premiums and brokerage is
deemed fully earned and coverage hereunder should continue until
expiry hereof, but only in respect to any loss(es)
sustained prior to the effective date of any such
takeover or merger.
There are no provisions contained, either directly or by
incorporation, in the Second Excess Crime and Excess E&O Policies which
provide that the second premium payment must be paid after the policy has
been terminated as a result of the appointment of a receiver.
The draft slips explicitly allocate the first premium payment to the
period April 22, 1999 to March 31, 2000; and the second premium payment to
the period April 1, 2000 to March 2, 2001.
The lead syndicate on the Second Excess Crime Policy was the D.J.
Marshall syndicate, and the lead underwriter was William Knapman.
CBL also bought additional errors and omissions coverage in the form of
an Excess Bankers Professional Indemnity Insurance, 509/QA539399 (the
"Excess E&O Policy") which provided coverage from April 22, 1999 to April
1, 2001. The policy provides $15 million of insurance excess of Section 2
of the Primary Policy (for claims arising out of wrongful acts in the
performance of professional services).
The Excess E&O Policy incorporates certain terms and conditions
of Section Two of the Primary Policy. Section Two of the Primary Policy
contains the following condition:
In the event of a takeover/merger, all premium and
brokerage is deemed fully earned and coverage hereunder
shall continue until expiry hereof, but only in respect
to any loss(es) sustained, or claim made prior to the
effective date of any such takeover or merger.
Section Two of the Primary Policy does not contain a provision equivalent
to General Condition 1 of the Section One of the Primary Policy.
The lead syndicate on the Excess E&O Policy was the Marshall syndicate
and the lead underwriter was William Knapman.
5. The Electronic All Risk Policy
CBL purchased an Electronic Securities and Physical Property Excess
Policy, 509/QR029198 (the "Electronic All Risk Policy"), which provided
$300 million in insurance excess of $200 million. Although generally in
excess of Section 1 of the Primary Policy, as well as the First and
Second Excess Crime Policies, the Electronic All Risk Policy does not
"follow form" to those policies. Section A (Electronic Securities)
insures against the loss or damage to Electronic Securities "held by the
Insured in any capacity or for which the Insured is legally liable" from
the fraudulent input of data into CBL's computer system and other similar
acts. Section B insures against:
physical Loss of or Physical Damage to Property owned
by or in the custody of the Insured whilst upon any
premises of the Insured or at any other recognized
place of safe deposit or whilst in transit.
Section B provides the traditional "All Risk" coverage that was sold to
financial institutions to provide protection for physical loss of or damage
to customers' property and securities.
The lead underwriter on this policy was Angus Roberts, from Janson Green,
Ltd., underwriting agents for Syndicate 79 at Lloyd's London. Michael Moss
was the second lead underwriter.
In January of 1998, representatives of three syndicates (Jane Bennett
and Chriss Warrior of D.P. Mann, Simon Allport of Ashley Palmer, and
David Foster of Janson Green) met with Virginia "Susie" Allen, the
director of marketing and administration of CBL, in San Diego, California
during an annual meeting of bank risk managers.
In May 1998, Credit Bancorp provided written notice of two separate
claims against the Primary and First Excess Crime Policies for the
disappearance of Fortune Financial Systems, Inc. ("Fortune Financial")
and Colorado Casino Resorts, Inc. ("Colorado Casino") stock certificates
from the premises of Citibank, N.A., New
York ("Citibank").*fn2 In
support of each claim, Richard Blech executed and notarized the Proof of
Loss filed by CBL. In both instances, Insurers reimbursed CBL for the
premiums paid to obtain the sole obligor lost instrument bonds ("LIBs")
required by the transfer agents to issue new certificates. Insurers also
authorized the issuance of "backup letters of indemnity," whereby
Insurers agreed to indemnify and hold CBL harmless, subject to the
terms, conditions and limitations of the Primary Policy, against loss
which CBL might sustain by reason of the issuance of the LIBs.
Each claim was submitted under Section 1(A), the "Bankers Policy"
section, of the Primary Policy and the First Excess Crime Policy. The
First Excess Crime Policy follows form to the Primary Policy. General
Condition 12, "Fraud," of the Primary Policy provides:
If the Assured shall make any claim knowing the same to
be false or fraudulent, as regards amount or otherwise,
this Policy shall be void and all claims hereunder
shall be forfeited.
These Claims were investigated by the law firm of Pattison & Flannery
(London Insurer's defense counsel in this case) and paid under the Primary
On June 9 and 10, 1998, two of the principal underwriters on the Primary
and First Excess Crime Policies (Lance Dalzell-Piper of D.P. Mann and Simon
Allport of Ashley Palmer) flew to Geneva and met with Richard Blech, the
chairman and CEO of CBL, at the Geneva office of CBL, the purpose of which
was to help the underwriters learn more about CBL's business.
On July 9, 1998, Richard Blech and Thomas Rittweger, the managing
director of North American operations of CBL, flew to London and met
with the underwriters who were considering whether to subscribe to the
Electronic All Risk Policy. At the London meeting, Richard Blech told
Michael Moss that CBL made money by engaging in "risk free" arbitrage
using funds "that they could raise against the stock to trade on behalf
The Underwriters reviewed the agreements between Douglas Brandon,
as Trustee, and the CBL customers related to the credit facility and
they represented that Mr. Brandon would be the sole signatory on the
account holding the customers' securities and that the customer-deposited
securities would be held in trust. Marsh also provided the Insurers with
examples of the actual agreements between CBL and the institutions that
held CBL's customers' securities as part of the credit facility; those
agreements were inconsistent with CBL's representations to customers about
the credit facility, and showed that Richard Blech, not trustee Brandon,
was the sole signatory on the accounts.
Many of the institutions that acted as depositories were separately
insured by Insurers. Though it is not the general practice to do so,
Insurers testified that they could have checked with those institutions
about CBL but did not.
The underwriters commissioned an investigation by CBL by Robert
Bishop, an investigator retained by Lloyd's underwriters to investigate
policyholders who drafted a report on CBL (the "Bishop Report") dated July
Michael Moss and Angus Roberts received the Bishop Report on CBL, and
the other Lloyd's underwriters who were considering whether to subscribe
to the Electronic All Risk Policy had access to the Bishop Report. Angus
Roberts, the Janson Green syndicate's underwriter who was considering
whether to subscribe to the Electronic All Risk Policy, also was an
underwriter on the Primary and First Excess Crime Policies.
The Bishop Report stated that the insurance policies were being
purchased to solve a "marketing problem for CBL" and noted that "the CBL
Insured Credit Facility Agreement is silent on whether CBL may use
collateral [customers securities] for a corresponding loan arrangement
with a foreign bank and how the bank's collateral interest would be
established in the securities held by the insured trustee."
In September of 1998, Malcolm Woolgar of the investigative unit
of the Corporation of Lloyd's received a report on CBL prepared by an
investigator named Michael Lloyd. Woolgar received the report from one
of his superiors, Andrew Wragg, whom in turn had received the report from
Great Britain's Financial Services Authority (the "FSA"), which was
investigating CBL; Andrew Wragg concluded that: "[CBL's insurance] is
probably being mis-stated, and being dressed up to look like FG [a
The Lloyd Report provided a brief overview of CBL and stated that the
information available "poses more questions that it answers," and stated
that "we have severe doubts as to the viability of this organization."
On September 2, 1998, another of Malcolm Woolgar's superiors at the
Corporation of Lloyd's, John Baker, spoke to a former director of CBL
named Anthony Baron and concluded that "the Company [CBL] was believed
to be operating a fraudulent scheme." Baron told John Baker that he
had reported CBL to both the Bank of England and to the Irish Banking
Authorities. Mr. Woolgar provided the Lloyd Report to Angus Reports