Vigilant Insurance Wins Dismissal of Bear Stearns Lawsuit

Chubb Corp.’s Vigilant Insurance unit won the dismissal of a lawsuit in which Bear Stearns Cos. accused the insurer of breaching a contract by refusing to pay part of a U.S. Securities and Exchange Commission settlement.

Bear Stearns in March 2006 agreed to pay $250 million to settle regulators’ claims it was at the center of a system for clients to break mutual-fund trading rules. The accord comprised $160 million in wrongful profit and a $90 million civil penalty.

Bear Stearns, which was bought by JPMorgan Chase & Co. in 2008, demanded that Vigilant indemnify it for the $160 million in profit. The insurer refused on the ground that the payment wasn’t an insurable loss or was excluded from coverage.

A state appeals court in Manhattan today granted Vigilant’s motion to dismiss the complaint. It reversed a September 2010 ruling by Justice Charles Ramos of state Supreme Court. Disgorgement of “ill-gotten gains or restitutionary damages” are not insurable under state law, the appeals court said.

“The public-policy rationale for this rule is that the deterrent effect of a disgorgement action would be greatly undermined if wrongdoers were permitted to shift the cost of disgorgement to an insurer,” Justice Richard T. Andrias wrote for the court.

Jennifer Zuccarelli, a JPMorgan spokeswoman, didn’t immediately return a telephone call seeking comment on the ruling.

The case is J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 600979/2009, New York State Supreme Court (Manhattan).