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As former Tyco International Chief Executive Officer L. Dennis Kozlowski’s criminal trial wound down to summations, he received a piece of good news from another Manhattan courtroom, a ruling directing an insurer to pay his defense costs — for now. Manhattan Supreme Court Justice Helen E. Freedman has granted Kozlowski’s motion for a declaration that Federal Insurance Co., which provided him and other former Tyco officers and directors with liability insurance, must pay his defense costs in the Manhattan criminal case and federal securities cases filed in New Hampshire, as well as defend him in consolidated federal ERISA cases filed by Tyco employees in that state. The criminal trial before Supreme Court Justice Michael Obus is wrapping up after five months of testimony in which jurors heard allegations that Kozlowski and former Chief Financial Officer Mark Swartz stole millions from the company by giving themselves unapproved bonuses and artificially pumping up the value of Tyco stock by lying about the company’s finances. In February 2003, after Kozlowski notified Federal of the criminal and civil suits against him and demanded the insurer provide him with a defense or pay his defense costs, Federal rescinded Tyco’s director and officer liability policies and returned the premiums. The insurer did so on the grounds that executives had misrepresented material information about Tyco’s finances and other matters in the applications for insurance, Freedman noted in her ruling, Federal Insurance Co. v. Tyco International Ltd., 600507/03. But the judge ruled that until Federal’s rescission claims were litigated and concluded in its favor, the insurance policies remain in effect. “[F]ederal’s unproven rescission claim does not affect its present obligation to defend Kozlowski or pay his defense costs under the policies. However, if Federal ultimately prevails in this action and the policies are declared to be void ab initio, Federal may be able to recover its costs for the defense it has provided Kozlowski,” Freedman said. Federal had alleged that it had extended its coverages only after its underwriters had reviewed Tyco’s public Form 10-K annual reports filed with the U.S. Securities and Exchange Commission in 2000 and 2001. The judge noted that Tyco also filed a disclosure with the SEC in September 2002 that Kozlowski and other Tyco executives had misappropriated more than $700 million. The same day Federal sent its rescission letter, Feb. 13, 2003, the insurer filed the action now before Freedman against Kozlowski, Tyco, and 14 other named defendants, as well as 50 John Does. It amended the complaint three months later to drop its claims against all the defendants except Kozlowski and three other former Tyco executives. Freedman said the allegations against Kozlowski in the criminal matter as well as in the ERISA and securities actions fall within the definition of the “wrongful acts” coverage of the policies. According to the policy, wrongful acts include misstatements, misleading statements, acts, omissions, neglect or breach of duty by Kozlowski in his capacity as an officer of Tyco. She rejected the insurer’s argument that an exclusion for “personal profit” in the policies barred his claim. The criminal indictment now contains multiple counts of grand larceny, falsifying business records and violating state business laws. It “alleges that Kozlowski obtained money illegally through the criminal enterprise, it also accuses him of crimes from which he did not directly profit,” the judge said. Since those counts do not fall within the “personal profit” exclusion, she said, Federal’s duty to provide defense costs extends to the entire criminal action. ERISA PLAINTIFFS The ERISA plaintiffs alleged that Kozlowski breached his fiduciary duty to the employee benefit plans and their participants by negligently misrepresenting Tyco’s financial information and failing to disclose material facts. But they did not allege that Kozlowski personally profited from his breach of fiduciary duty, and therefore, the exclusion did not apply to those actions, Justice Freedman said. Similarly, the exclusion did not apply to the securities claim, she said, because although he may have indirectly profited from allegedly overstating the company’s assets and withholding material information, the plaintiffs’ claims are based upon his alleged misstatements and omissions and the harm they caused the plaintiffs. Kozlowski was represented by Philippe A. Zimmerman of Moses & Singer, and Andrew M. Reidy of McKenna Long & Aldridge in Washington, D.C. Paul Sweeney and Christopher B. Wren of Hogan & Hartson appeared for Federal Insurance.

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