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Federal Insurance Co. v. Tyco International Ltd.

Supreme Court, New York, County

August 10, 2006

Federal Insurance Company, Plaintiff,
v.
Tyco International Ltd., et al. Defendants, Index No. 600507/03

Unpublished Opinion

HELEN E. EREEDMAN, J

Plaintiff Federal Insurance Company ("Federal") commenced this declaratory judgment action to resolve whether it is obligated to defend and identify defendants Tyco International, Ltd. ("Tyco") and former Tyco officers and directors in the civil lawsuits and criminal proceedings brought against those defendants.[1] Defendant L. Dennis Kozlowski now moves for an order directing that Federal pay him about S 17.8 million as a first installment for the costs and fees that he incurred to defend himself in the now-concluded criminal proceeding against him and defendant Mark H. Swartz, People v. Kozlowski, index no. 5259/02 (Sup. Ct. N.Y. Co.) (the "Criminal Action")[2], and the related civil forfeiture action, Morgenthau v. Kozlowski___ no, 403698/02 (Sup, Ct. N.Y. Co.) Federal opposes and cross-moves for _________partial summary judgment and declaring that the Policies that it issue ________ Kozlowski's or Swartz's defense costs in the Criminal Action.

For the reasons set forth below, Kozlowski's motion is denied and Federal's cross-motion is granted.

Background:

Criminal Action -

Kozlowski and Swartz were indicted for conspiring to steal Tyco assets and defraud its investors, and for falsifying business records to conceal their crimes. After a mistrial followed by a six-month trial ending in June 2005, the jury found Kozlowski and Swartz each guilty on twelve counts of grand larceny in the first degree (in violation of New York Penal Law ("NYPL") § 155.42), one count of conspiracy in the fourth degree (in violation of NYPL § 105.10[1]), one count of securities fraud (in violation of the Martin Act, N.Y. Gen. Bus. Law § 352-c[5])), and nine counts of falsifying business records in the first degree (in violation of NYPL § 175.10). The Court sentenced both Kozlowski and Swartz to prison terms of 8 and 1/3 years to twenty-five years. The Court also (1) ordered them to pay restitution to Tyco that totaling about $ 134 million, for which the Court held them jointly and severally liable, (2) ordered Swartz to pay Tyco an additional $1.2 million, and (3) imposed fines of S70 million on Kozlowski and $ 35 million on Swartz.

Kozlowski and Swartz were not convicted of a few of the charges. Of the thirty-one counts submitted to the jury, Kozlowski and Swartz were acquitted of "Count # 17", which charged that they falsified business records in the first degree in connection with the "Tyco International (US) Inc. Florida Corporate Headquarters Relocation program." Moreover, certain were never submitted to the jury (the "Dropped Charges.') These included a charge of enterprise corruption, two grand larceny charges, and a falsifying of business records charge.

Coverage provisions -

Moving for an order directing payment, Kozlowski claims that Federal must reimburse his defense expenses for the Criminal Action pursuant to "Insuring Clause 1" of the Executive Liability and Indemnification section of the Policies (the "ELI Section"), which applies to "Loss for which the Insured Person is not indemnified by [Tyco] and which the Insured Person becomes legally obligated to pay on account of any Claim first made against him . . . during the Policy Period . . . for a Wrongful Act."[3]

The Policies contain two relevant coverage exclusions. Section 6(b) of the ELI Section (the "Fraudulent Acts Provision") provides:

[Federal] shall not be liable under Insuring Clause 1 for Loss on account of any Claim made against any Insured Person . . . based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by such Insured Person, if a judgment or other final adjudication adverse to the Insured Person establishes such a deliberately fraudulent act or omission or willful violation ....

Section 6(c) of the ELI Section (the "Personal Profit Provision") provides:

[Federal] shall not be liable under Insuring Clause 1 for Loss on account of any Claim made against any Insured Person . . . based upon, arising from, or in consequence of such Insured Person having gained in fact any personal profit, remuneration or ...

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