A recent Business Insurance story, “Insurers Must Pay MBIA’s Legal Costs from Restructuring: Court,” reports that Lloyd’s of London syndicate underwriters, an American International Group Inc. unit and a German insurer are obligated to pay defense and settlement costs in connection with MBIA Inc.’s 2009 restructuring under the insurer’s financial institutions professional indemnity primary and excess policy, a federal court has ruled.

The ruling by U.S. District Court in New York in MBIA Inc. v. Certain Underwriters at Lloyd’s London, Lexington Insurance Co. and Wurttembergische Versicherung A.G. says the insurer has “incurred tens of millions of dollars” to defend itself in this litigation.  The ruling by U.S. District Judge Shira A. Scheindlin, however, says it is still too early to rule on other litigation against MBIA because it involves cases that have not yet been resolved.

MBIA had purchased primary financial institutions professional indemnity policies for 2007-2008 and 2008-2009 – with a limit of $15 million and excess policies for those years – that provided another $15 million in coverage from Lloyds syndicates 2987 and 1274, AIG unit Lexington Insurance Co. and Stuttgart, Germany-based Wurtt Vers, according to the ruling.  In February 2009, MBIA separated its subsidiaries to provide municipal and state issuers frozen out of the public finance market with financial guarantee policies, while attracting capital investment to the holding company’s benefit, according to the ruling. 

In what has been labeled “transformation cases,” MBIA was subsequently named as defendant in lawsuits charging that this was improper because it deprived plaintiffs of the benefits of the financial guarantee insurance MBIA sold and lowered the insurer’s MBIA Insurance unit’s credit rating.  The cases were eventually settled or dismissed, but underwriters refused to reimburse MBIA under its policies, arguing they were only obligated to make payment after other litigation against MBIA reached final disposition. 

Judge Scheindlin disagreed.  “MBIA can seek recovery of loss from the transformation cases because unlike (other litigation) all underlying lawsuits involving identical or related wrongful acts have a final disposition.”  The judge also held that MBIA’s actions constitute professional services and are therefore covered, and that a financial guarantee exclusion is not applicable.  The court held, however, that the insurers were not obligated to reimburse MBIA in connection with other litigation filed against it because there cases are still pending.  Last year, MBIA agreed to pay $350 million to settle litigation over its restructuring.