The opinion of the court was delivered by: Gerard E. Lynch, District Judge
In three separate actions, Allied World Assurance Company ("AWAC"), Arch Insurance Company ("Arch"), and XL Specialty Insurance Company ("XL") (collectively, "the insurers") move for summary judgment declaring that they are not obliged to provide coverage to various former directors & officers of Refco*fn1 (collectively, "the insureds") under the terms of the 2005-2006 Directors and Officers ("D&O") liability insurance policies they issued to Refco.*fn2 For the reasons stated below, AWAC's and Arch's motion will be granted. XL's motion will be denied.
I. Refco's Collapse and Bankruptcy
Prior to its implosion in the fall of 2005, Refco was one of the world's largest providers of brokerage and clearing services in the international derivatives, currency, and futures markets. See In re Refco, Inc. Sec. Litig., No. 07 Civ. 11604, 2008 WL 1827644, at *1 (S.D.N.Y. April 21, 2008). On October 10, 2005, two months after its initial public offering ("IPO"), Refco announced that it had been carrying an undisclosed $430 million receivable from Refco Group Holdings, Inc. (the "RGHI Receivable"), an entity controlled by Refco's CEO, Phillip R. Bennett. Refco revealed that the receivable consisted of uncollectible debts originating in the late 1990s, and that the related-party nature of the receivable had been hidden from the company's auditors for years by fraudulent loan transactions entered at the end of Refco's quarterly financial reporting periods. The company announced that, as a result of the RGHI Receivable, its prior financial statements, including those incorporated into its IPO registration statement, could not be relied upon. See Axis Reinsurance Co. v. Bennett, Nos. 07 Civ. 7924, 08 Civ. 3242, 2008 WL 2485388, at *1 (S.D.N.Y. June 19, 2008). Following these disclosures, Refco's stock plummeted and was de-listed by the New York Stock Exchange, leading to over $1 billion in lost market capitalization. See In re Refco, 2008 WL 1827644, at *1.
On or about October 17, 2005, Refco Inc. and many of its subsidiaries filed for protection under Chapter 11 of Title 11 of the United States Code. See Axis, 2008 WL 2485388, at *1.
II. The Underlying Actions
The collapse and ensuing bankruptcy of Refco in October 2005 triggered an onslaught of litigation (the "Underlying Actions") against certain Refco officers and directors. Many of the Underlying Actions were or are now pending before this Court, including In re Refco, Inc. Securities Litigation, No. 05 Civ. 8626 (GEL) (S.D.N.Y.); American Financial International Group et al. v. Bennett et al., No. 05 Civ. 8988 (GEL) (S.D.N.Y.); In re Refco Capital Markets, Ltd. Brokerage Customer Securities Litigation, No. 06 Civ. 643 (GEL) (S.D.N.Y.); VR Global Partners, L.P. v. Bennett et al., No. 07 Civ. 8686 (GEL) (S.D.N.Y.); Capital Management Select Fund Ltd. v. Bennett et al., No. 07 Civ. 8688 (GEL) (S.D.N.Y.); Kirschner v. Thomas H. Lee Partners, L.P. et al., No. 07 Civ. 7074 (GEL) (S.D.N.Y.); Kirschner v. Bennett et al., No. 07 Civ. 8165 (GEL) (S.D.N.Y.); and Kirschner v. Grant Thornton LLP et al., No. 07 Civ. 11604 (GEL) (S.D.N.Y.). The government also initiated criminal proceedings against several Refco officers.
Bennett, Robert C. Trosten, and Santo Maggio each pled guilty to criminal charges arising out of the fraud at Refco. (IJX 17, 20-22.)*fn3 Tone E. Grant was convicted by a jury at his criminal trial. (IJX 24 at 3095-97.)
III. Bennett's Guilty Plea
On February 15, 2008, Bennett pled guilty to all twenty charges against him in the Criminal Action as set forth in the third superseding indictment (the "S3 Indictment"), including conspiracy, money laundering, making false statements to the SEC, and securities, wire and bank fraud. The S3 Indictment alleged, among other things, that Bennett had knowledge of, and actively participated in, the scheme by which Refco packaged its uncollectible debts into a receivable from RGHI and disguised the nature of the debt through a series of transactions at the end of each financial quarter ("the RGHI Receivable Scheme")before August 11, 2005. (IJX 18, S3 Indictment, ¶¶ 7-9, 13-17, 21-25, 31-36, 38-55.) At his plea allocution, Bennett explicitly admitted his knowledge of and role in the RGHI Receivable Scheme. (IJX 21, 2/15/08 Tr. 16-20.) The court found that Bennett's plea was made voluntarily and knowingly and that a sufficient factual basis for the plea existed. (Id. 20.)
In his sentencing memorandum to the court, Bennett reconfirmed his role in the RGHI Receivable Scheme. The memorandum states that
[i]n the late 1990s, Mr. Bennett -- recognizing that Refco's very existence was at stake following several business reversals . . . came up with a plan, admittedly ill-conceived, and indeed unlawful, to keep the company in business, by eventually absorbing these losses into the RGHI receivable and then disguising the related-party nature of the receivable.
(Declaration of John H. Eickemeyer in support of Arch Insurance Company's motion for summary judgment ("Eickemeyer Decl."), Ex. G, Bennett Sentencing Memorandum at 20.)
On July 3, 2008, Bennett was sentenced to sixteen years in prison. (IJX 23.)
IV. Refco's D&O Liability Insurance "Tower"
In advance of its August 2005 IPO, Refco obtained D&O insurance for the period from August 11, 2005 to August 11, 2006. The insurance was structured as a tower, consisting of a primary policy and five excess policies totaling $70 million in coverage. U.S. Specialty Insurance Company issued the primary policy with limits of $10 million in excess of applicable retentions. (IJX 26.) Lexington Insurance Company issued a first excess policy with limits of $7.5 million in excess of $10 million. Axis Reinsurance Company issued a second excess policy with limits of $10 million in excess of $17.5 million. AWAC issued a third excess policy with limits of $12.5 million in excess of $27.5 million. Arch provided the fourth excess layer of $10 million in excess of $40 million. XL provided the fifth excess layer of $20 million in excess of $50 million. (IJX 29.)
V. The AWAC, Arch, and XL Policies
A. The AWAC and Arch Policies
The AWAC and Arch Policies both "follow the form" of the underlying insurance policies, meaning that they provide coverage in conformance with the provisions of the U.S. Specialty Policy, except to the extent that they contain limitations or restrictions beyond those outlined in the underlying insurance. (IJX 29, Insuring Agreement; IJX 30, Section I.C.) The Arch Policy specifically provides that "[i]n no event shall this Policy grant broader coverage than that provided by the most restrictive policy included in the Underlying Insurance." (IJX 30, Section I.C.)
The Primary Policy to which the AWAC and Arch Policies follow form contains the following endorsement, labeled "Full Severability:"
The Insureds represent that the particulars and statements contained in the Application are true, accurate and complete and are deemed material to the acceptance of the risk assumed by the Insurer under this Policy. This Policy is issued in reliance upon the truth of such representations. No knowledge or information possessed by any Insured will be imputed to any other Insured. If any of the particulars or statements in the Application is untrue, this Policy will be void with respect to any Insured who knew of such untruth. (IJX 26, End. No. 10; emphasis added.)
The AWAC Policy, which was issued on March 16, 2006, includes as an endorsement a Prior Knowledge Exclusion ("PKE") which provides:
It is hereby understood and agreed that the Insurer shall not be liable for Loss in connection with any claim or claims made against the Insureds: (a) alleging, arising out of, based upon, in consequence of, or attributable to facts and circumstances of which any Insured had knowledge as of inception and (I) which a reasonable person would suppose might afford valid grounds for a claim which would fall within the scope of the coverage hereunder, or (ii) which indicate the probability of any such claim. (IJX 29 at Endorsement No. 3; emphasis added.) AWAC's August 10, 2005 policy binder -- i.e., the document that served as the temporary or interim policy until the issuance of the formal policy, see Springer v. Allstate Life Ins. Co. of New York, 94 N.Y.2d 645, 649 (2000), lists among the applicable endorsements an "Inverted Warranty Exclusion as of Inception" but does not refer to a PKE. (Declaration of Jerome W. Brendle in support of Allied World's motion for summary judgment ("Brendle Decl."), Ex. B.)
The Arch Policy issued on March 7, 2006. It includes the following PKE among its endorsements:
If any Insured as of August 11, 2005 has any knowledge of or information concerning any act, error, omission, fact, matter, or circumstance that might give rise to a Claim under this Policy, the 
Insurer shall not be liable to make any payment under this Policy as a result of a Claim arising out of, based upon or attributable to any such act, error, omission, fact, matter or circumstance. (IJX 30, Endorsement No. 4; emphasis added.) Arch's binder, issued on August 10, 2005, did refer to a PKE. (Eickemeyer Decl., Ex. J.)
XL issued its Policy on December 27, 2005. (Declaration of Pamela Sylwestrzak in connection with XL's motion for summary judgment ("Sylwestrzak XL Decl.") ¶ 6 and Ex. B.) XL's Policy, which does not follow form to the U.S. Specialty Policy, includes a severability provision in its "Representation Clause:"
Each Insured Person represents that the statements and particulars contained in the Application are true, accurate and complete, and agree that this Policy is issued in reliance on the truth of that representation, and that such particulars and statements, which are deemed to be incorporated into and constitute a part of this Policy, are the basis of this Policy. No knowledge or information possessed by any Insured Person will be imputed to any other Insured Person for the purposes of determining the availability of coverage with respect to Claims made against any other Insured Person. (IJX 31, Condition (K); emphasis added.)
The XL Policy also contains a knowledge exclusion, termed an Inverted Representation Endorsement ("IRE"), which provides as follows:
In consideration of the premium charged, no coverage will be available under this Policy for Loss, including Defense Expenses, from Claims arising from any fact, circumstance or situation of which, as of the effective date of this Policy, any Insured had knowledge and had reason to suppose might afford grounds for any Claim that would fall within the scope of the insured afforded by this Policy. (Sworn Declaration of Henry Toolan in support of XL's motion for summary judgment ("Toolan Decl."), Ex. A, End. No. 13; emphasis added.)
The binder which XL issued on August 10, 2005 did not refer to any type of knowledge exclusion.
VI. Procedural History of the Litigations
A. AWAC Procedural History
By letter dated March 28, 2006, AWAC denied coverage for all the Underlying Actions arising from the collapse of Refco. AWAC's denial of coverage was based on, among other grounds, the Prior Knowledge Exclusion contained in its Policy. (See Declaration of Robert W. DiUbaldo in support of AWAC's motion for summary judgment ("DiUbaldo Decl."), Ex. E.) AWAC ...