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Judge Rebuffs Insurers' Bid to Rescind Milberg's Coverage
New York Law Journal
October 05, 2009
Former insurers of securities class action firm Milberg waited too long to rescind coverage and sue for repayment of money spent defending the firm in a kickback probe, a Manhattan federal judge has ruled, holding that the carriers knew the law firm was under indictment yet failed to act.
"The law does not protect the plaintiff who turns a blind eye to such information," Southern District Judge Loretta A. Preska wrote in Certain Underwriters at Lloyd's v. Milberg, 08-civ-7522, ruling the carriers' rescission claims were untimely under New York's six-year statute of limitations.
In May 2006, a Los Angeles grand jury indicted the firm, then known as Milberg Weiss Bershad & Schulman, on federal bribery and fraud charges stemming from a $251 million scheme that paid kickbacks to name plaintiffs to file shareholder and class action cases.
The firm settled the case in June 2008 by pleading guilty and paying $75 million.
Four partners, including co-founder Melvyn Weiss, name partners David Bershad and Steven Schulman and former name partner William Lerach also pleaded guilty for their roles in the scheme and all received prison sentences ranging from six to 30 months.
In January 2002, the firm entered into an interim agreement with its carriers -- Certain Underwriters at Lloyd's and Zurich Specialties in London, and its U.S. insurer, Illinois Union Insurance -- to fund the firm's defense after Milberg was subpoenaed to testify before grand juries in California and Pennsylvania.
The carriers claimed they were defrauded because in applying for the policies, which took effect in January 2001 and expired in January 2004, Bershad had stated that no attorney at the firm knew of "any circumstances ... which may result in a claim being made against" the firm.
But after the firm and Bershad and Schulman were indicted in May 2006, the London insurers denied "there was any obligation to defend or indemnify the allegations in the indictmen[t]," according to the decision.
The London insurers sued in August 2008, seeking rescission and reimbursement of $4.8 million they spent defending the firm and its partners, said Milberg attorney Mark S. Mayerson, of Spriggs & Hollingsworth in Washington, D.C. Illinois Union intervened in November 2008, alleging similar claims.
In dismissing the majority of the case, Preska ruled that the law firm's malpractice carriers had no reason to wait for the criminal probe to conclude.
"Rather than awaiting the results of the government's prosecution of Milberg, the London Insurers should have committed their own inquiry into whether Milberg might have committed fraud in obtaining the London Policies," she wrote.
The court ruled that Milberg and its former partners could raise a statute of limitations defense, as the carriers had ample reason to doubt the firm's "emphatic denial" of wrongdoing.
Specifically, Milberg had informed its insurers of the ongoing probe in January 2002 and had "explicitly detailed" the allegations and the "widely available" media coverage of the case in a May 2002 letter.
The letter described the investigation into claims the firm had "improper financial arrangements with plaintiffs in a number of securities class actions," according to the decision, and should have triggered a policy check, the judge wrote.
But there was no indication that the London insurers had looked into when the alleged kickbacks had taken place and whether the carriers could validly disclaim coverage, the court held.
"The most striking example of Plaintiffs' willful ignorance of their potential rescission claim is their failure to have made any inquiry after Milberg was indicted," Preska wrote.
A "prudent insurer" would have spotted a potential claim after giving the indictment even a cursory glance, she held, in ruling that the rescission claims were time-barred.
As Illinois Union "also appears to have ignored the extensive news coverage" of the investigation and did not claim it made any inquiry into potential fraud, its claims were similarly untimely, the court held.
Preska kept alive declaratory judgment claims by Illinois Union, but noted they would amount to an "advisory opinion" as there were no allegations the carrier had ever made any payments under the policy. She gave the parties 20 days to advise the court why the claims should not be dismissed.
Mayerson said in an interview that the decision was ironic, given that "New York law typically requires the insured to act very promptly to give notice to their insurance company." Here, the insurance companies were timely notified but "never sought rescission before and did not enter into a tolling agreement," he said.
David J. Przygoda of Ropes & Gray in Manhattan represented the London insurers.
Kevin F. Cavaliere of Steinberg & Cavaliere in White Plains represented Illinois Union Insurance.
