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February 3, 2005.

IN RE WORLDCOM, INC. SECURITIES LITIGATION. This Document Relates to: 03 Civ. 652 03 Civ. 758 03 Civ. 7927 03 Civ. 9460 04 Civ. 4089 04 Civ. 4546 04 Civ. 4567.

The opinion of the court was delivered by: DENISE COTE, District Judge


This motion addresses the right of a member of a board of directors to receive from his insurer payment of the costs of defending himself against litigation when the insurer contends that the insurance policy has been rescinded due to a submission of allegedly false financial statements with an application for insurance. Bert C. Roberts, Jr. ("Roberts"), a former chairman of the board of directors of WorldCom, Inc. ("WorldCom") seeks an order compelling Continental Casualty Company ("Continental") to honor an excess directors and officers ("D & O") liability policy that it issued and to advance immediately the costs of defending Roberts against claims filed in a host of lawsuits arising from the collapse of WorldCom which allege principally violations of federal securities laws. Continental asserts that it rescinded the D & O policy for fraud, that it is void ab initio, and that Page 3 as a result, it has no present obligation to pay defense costs. For the reasons stated below, Roberts' motion is granted.


  On June 25, 2002, WorldCom announced a massive restatement of its financial statements. The first class action lawsuit to anticipate that announcement had been filed in this district on April 25, 2002. Many more followed. The litigation concerning WorldCom filed in federal court, or successfully removed to federal court, has been consolidated for pretrial purposes in the Southern District of New York by the Judicial Panel on Multi-District Litigation and assigned to this Court. Roberts is named as a defendant in the consolidated WorldCom securities class action as well as in numerous other related lawsuits. The issues in and the history of the consolidated WorldCom securities litigation ("Securities Litigation") have been described in many previous Opinions.*fn1

  WorldCom and its officers and directors were insured under a D & O liability policy issued by National Union Fire Insurance Page 4 Company of Pittsburgh, Pennsylvania ("National Union"). The National Union policy provided primary coverage.

  The first page of the National Union renewal policy for 2002 states in bold letters "NOTICE: . . . THE INSURER MUST ADVANCE DEFENSE COSTS PAYMENTS PURSUANT TO THE TERMS HEREIN PRIOR TO THE FINAL DISPOSITION OF A CLAIM." The National Union policy provision that defines the coverage for directors is contained in Clause 1, entitled "Insuring Agreements. Coverage A: Directors and Officers Insurance," and provides as follows:
This policy shall pay the Loss of each and every Director or Officer arising from a Claim first made against the Directors or Officers during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act in their respective capacities as Directors or Officers of the Company, except when and to the extent that Company has indemnified the Directors or Officers. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition.
(Emphasis supplied.) Clause 8 of the policy provides:
Under both Coverage A and Coverage B of this policy, except as hereinafter stated, the Insurer shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by the Insureds or the Company severally according to their respective interests, in the event and to the extent that the Insureds or the Company shall not be entitled under the terms and conditions of this policy to payment of such Loss.
(Emphasis supplied.)
  The National Union policy provides for limited severability for individual directors in connection with three questions. National Union did not require the questions to be answered since they were included as part of a renewal program, and they were Page 5 not answered. Of particular interest here, one question stated "9. (a) No Executive has knowledge or information of any act, error or omission that might give rise to a Claim . . . under the proposed policy, except as follows:. . . ." (Emphasis supplied.) The National Union policy continued with the statement that
[i]t is agreed that with respect to Questions 8, 9 and 10 above, that if such claim, proceeding, action, knowledge, information or involvement exists, then such Claim, proceeding or action and any Claim or action arising from such claim, proceeding, action, knowledge, information or involvement is excluded from the proposed coverage.
(Emphasis supplied.)

  Endorsement No. 1 of the policy provides that "[i]f this policy has been in effect for thirty (30) days or more, the Insurer may cancel this policy only if one or more of the following reasons apply: . . . 2) . . . a material or willful misstatement or omission of fact . . . in connection with any application ?, or claim. . . ." Such a cancellation occurs thirty days after notification of cancellation.

  On July 21, 2002, WorldCom filed for bankruptcy protection. On November 8, 2002, WorldCom filed an Emergency Motion Pursuant to Bankruptcy Rule 9019(a) for Approval of Debtors' Settlement Agreement with National Union. As part of the terms of this agreement, the National Union D & O policy was rescinded and voided ab initio as to WorldCom only. The agreement provides the following as to directors:

  The Policies provide rights and coverage to the directors, officers, and employees of WorldCom as insureds under the Policies severally, and not jointly or with imputation of knowledge or conduct, with Page 6 respect to the applications for the Policies and the exclusions in the Policies, and the Policies are not rescinded as to any directors, officers, and employees of WorldCom as insureds under the Policies.

 (Emphasis supplied.)

  On November 26, 2002, the bankruptcy court approved this settlement agreement. National Union acknowledged the coverage obligations of its policy as to the WorldCom directors and officers and its coverage has been paid in full and is exhausted.

  This suit concerns the rights of the insureds vis a vis the excess carriers. After being contacted by the New York office of an insurance agent acting on behalf of WorldCom, in December 2001, Continental sold an excess directors, officers, and corporate liability insurance policy to WorldCom. Altogether, WorldCom and its officers and directors were insured for D & O liability coverage under seven tiers of excess D & O policies issued by Continental; Twin City Fire Insurance Company ("Twin City"); Associated Electric & Gas Insurance Service Limited ("AEGIS"); Gulf Insurance Company ("Gulf"); SR International Business Insurance Company ("Swiss Re"); Starr Excess Liability Insurance International Limited ("Starr"); and in a final tier, National Union (collectively, the "Excess Insurers"). With one apparent exception that is not relevant to the instant motion,*fn2 all of the excess D & O policies follow the form, including the Page 7 terms, conditions, and exclusions, of the underlying National Union D & O policy.

  As part of the application for the Continental policy, WorldCom submitted WorldCom's 10-K for the year ending December 21, 2000; WorldCom's 10-Qs for the second and third quarter of 2001; WorldCom's annual report for 2000; and various registration statements filed with the Securities and Exchange Commission. Together, the seven tiers of excess insurance provided $85 million in coverage in addition to $15 million in coverage provided under National Union's primary policy for a total of $100 million in insurance coverage.*fn3

  The first lawsuit arising from the WorldCom debacle was apparently filed on March 26, 2002, in Mississippi. WorldCom, on behalf of Roberts, timely notified the National Union and the Excess Insurers of the litigation, and complied with all conditions precedent in the excess D & O policies, or is otherwise excused from doing so. WorldCom demanded that the Excess Insurers acknowledge that the D & O policies are required to pay the defense costs incurred in connection with what is now known as the Securities Litigation.

  In a September 12, 2002 letter to WorldCom,*fn4 Continental indicated that based on the material misrepresentations and Page 8 omissions by WorldCom and its officers and directors, it considered its excess D & O policy to be void ab initio and viewed the policy as rescinded. In the September 12 letter, Continental stated that it would "next week return the premium payment of $1,300,000 together with interest required by law."*fn5

  On January 28, 2003, Continental filed a declaratory judgment action in the Southern District of New York seeking a judicial determination that it had properly rescinded its policy.*fn6 An August 1, 2003 order ("August 1 Order") of the Bankruptcy Court stayed that action, captioned Continental Cas. Co. v. Ebbers, No. 03 Civ. 652 (DLC). The August 1 Order concluded that the action, as well as a parallel action brought by Twin City, No. 03 Civ. 758 (DLC), were void ab initio as they should not have been brought without first seeking relief from the automatic stay.*fn7 Meanwhile, on January 29, 2003, WorldCom filed an adversary proceeding in the Bankruptcy Court on behalf of itself and its directors seeking a declaration of rights under the excess D & O policies. Continental opposed WorldCom's motion for partial summary judgment in the adversary proceeding by arguing that its policy was void ab initio and rescinded. On April 20, 2004, WorldCom emerged from bankruptcy. A May 14, 2004 Page 9 order of the Bankruptcy Court concluded that it was no longer the proper forum to address disputes about the WorldCom insurance policies and proceeds. Having ...

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