Pay First, Rescind Later

In the wake of recent corporate scandals, directors-and-officers insurance carriers have sought to rescind policies that were allegedly purchased on the basis of misrepresentations. Not surprisingly, this has led to insurance coverage litigation. (The 10b-5 Daily has recently posted about the Cutter & Buck and Rite-Aid cases.)

The Wall Street Journal has an article (subscrip. req’d) on a recent decision by Judge Baylson of the E.D. of Pa. holding that Aegis Bermuda must pay the defense costs for several directors and officers involved in litigation, including a securities class action, over the collapse of Adelphia Communications. Although Adelphia is in bankruptcy proceedings, temporarily preventing Aegis Bermuda from taking legal action to rescind its policy, the court reportedly held that the insurer would have to continue paying legal fees until a judgment permitting recission was obtained.

Quote of note: “‘Insurance carriers do not function as courts of law,’ U.S. District Judge Michael M. Baylson wrote. ‘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.'”

Addition: The decision is available on Westlaw – Associated Electric & Gas Insurance Services, Ltd. v. Rigas, 2004 WL 540451 (E.D. Pa. March 17, 2004).

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