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A precedent-setting decision by the New York State Court of Appeals will most likely impact the way companies and regulators resolve regulatory investigations and litigation.

On March 13, 2008, the Court of Appeals unanimously rejected claims for insurance by the Bear Stearns Companies, Inc. to cover any portion of the $80 million Bear Stearns paid to settle securities enforcement claims because Bear Stearns failed to obtain its insurers’ consent to the settlements.

The litigation arose out of Bear Stearns’ 2003 global settlement with federal and state securities regulators following a joint investigation into potential conflicts of interest raised by the investment banking activities of the firm’s research analysts. By December 2002, Bear Stearns had signed a settlement-in-principle acknowledging that regulators would commence proceedings against it, and that Bear Stearns would consent to the proceedings and relief sought without admitting or denying the allegations. Bear Stearns then signed a consent agreement on April 21, 2003, agreeing to pay $80 million to settle the claims. The agreement was not subject to the insurers’ approval, and it permitted the SEC to submit a final judgment to the federal court without further notice to Bear Stearns. Three days later, Bear Stearns notified its insurers of the agreement and asked them to consent.

The Court of Appeals held that the insurance policy issued to Bear Stearns unambiguously required it to obtain the consent of its insurers before reaching the settlement, and that Bear Stearns had breached this provision when it executed a settlement agreement with the regulators before obtaining the insurers’ consent - even though the settlement was still subject to court approval. Despite arguments to the contrary, the court’s decision includes no requirement that the insurers demonstrate prejudice of any kind arising out of the failure to seek prior consent in order to enforce the consent provision.

New York law is now clear that insurance policy consent provisions are enforceable as written, and that insurers have a reserved seat at the settlement table when a company contemplates using insurance proceeds to fund any part of a settlement. Settling parties are now well advised to include their insurers in settlement negotiations at the earliest possible stage.