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Finding that an insurer had no right to unilaterally rescind a directors’ and officers’ liability policy, a federal judge has awarded $1.5 million to five former executives of Adelphia Communications — $300,000 each — to cover the costs of defending themselves in civil lawsuits. “Insurance carriers do not function as courts of law. If a carrier wants the unilateral right to refuse a payment called for in the policy, the policy should clearly state that right. This policy does not do so,” U.S. District Judge Michael M. Baylson wrote in a 32-page opinion in Associated Electric & Gas Insurance Services Ltd. v. Rigas. The ruling is a victory for attorneys J. Bradford McIlvain and John J. Higson of Dilworth Paxson in Philadelphia, who represent Adelphia founder John Rigas and three of his sons, all former Adelphia executives, as well as for attorneys Alex D. Hardiman, Timothy P. Law and R. Mark Keenan of Anderson Kill & Olick, who represent former executive Peter L. Venetis. Adelphia, the nation’s fifth-largest cable television provider, is in bankruptcy and four of its former top executives are on trial in U.S. District Court in New York, facing criminal charges of fraud and conspiracy for allegedly looting the former Coudersport, Pa.-based company of millions of dollars. On trial are John Rigas and two of his sons, Timothy and Michael, as well as former executive Michael Mulcahey. They face charges of conspiracy and securities, bank and wire fraud that allegedly cost shareholders more than $50 billion. Venetis and James Rigas are named as defendants in civil suits but have not been charged with any crime. Although the bankruptcy and criminal case are both in New York courts, the dispute over the D&O insurance policy was filed in federal court in Philadelphia by three insurers — AEGIS as primary insurer and Federal Insurance Co. and Greenwich Insurance Co. as excess carriers. Soon after the insurance suit was filed, it was put on hold by the automatic stay provisions in the bankruptcy court. But in a series of rulings, the bankruptcy court cleared the way for the Rigases and Venetis to pursue the Philadelphia case on the limited issue of whether the insurers were required to make immediate payments of $300,000 to each man for civil defense costs. Lawyers for the former executives argued that the language of the policies called for immediate payment of civil defense costs. At a minimum, they said, the language is ambiguous on the issue of advancing civil defense costs, and Pennsylvania law requires that an ambiguous policy be construed for the benefit of the insureds. But lawyers for the three carriers argued that the policies were rescinded even before the declaratory judgment suit was filed. Rescission, they argued, is an action an insurer can take unilaterally without any judicial determination. But Baylson found that the rescission was never completed because the insurers have not yet returned the premiums they were paid. According to the insurers, the bankruptcy court’s stay prevents them from returning the premiums. And under the bankruptcy court’s order, Baylson said, the insurers’ claim for rescission is still subject to the stay. Since the rescission claim cannot be litigated now, Baylson said, the former executives cannot be denied their rights under the policies to immediate payment of their civil fees. “The inability of this court to find facts as to the exclusion should not operate to deny a benefit under the policy,” Baylson wrote. “If Adelphia were not in bankruptcy, this court could proceed to make the determinations required under the language of the policy. However, bankruptcy courts have the power to stay other related litigation, and thus the inability of this court to make those factual determinations on the applicability of the policy exclusions at this time should not result in a windfall to either party, not contemplated as part of the contract,” Baylson wrote. Since the policy provides for advancing defense costs, Baylson said, “that provision should be enforceable where an exclusion that requires fact finding is not available because of the bankruptcy court’s stay.” Baylson said his ruling was also buttressed by public policy, including the presumption of innocence in criminal cases. “Until and unless they [John, Timothy and Michael Rigas] are found guilty, they are presumed innocent and must enjoy the constitutionally based prerogatives of any citizen who stands merely accused, but not convicted, of a crime,” Baylson wrote. And in the civil lawsuits, Baylson said, all five executives “face judgments of many millions of dollars” if they are found liable, but “at this moment, they have not been found liable to anyone for anything.” Baylson ordered AEGIS to advance $300,000 to each of the five but said the money “is only to be used for the civil cases.” But due to the “seriousness” and “complexity” of those cases, Baylson said, “it is obvious in today’s marketplace that $300,000 only buys a limited amount of defense costs, but will give these five insureds a reasonable fund to pay their counsel.”

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