This decision has garnered much attention in both legal and insurance circles over the past two weeks.

What has caught everyone’s attention is not so much the decision itself – a somewhat ordinary approval of a proposed consent judgment between the SEC and a corporation and certain of its officers – but rather the dicta of Judge Rakoff expressing concern over allowing the defendants to neither admit nor deny liability in entering into the consent judgment. The settlement underlying the consent judgment was in the amount of $3M and was likely not insured under any D&O policy because it constituted a civil penalty and/or represented disgorgement of ill-gotten gain. An educated guess, however, is that it may well have been indemnified or indemnifiable by the corporation. Hence, the settlement at this amount could have been very attractive to the corporation and the individuals.

Despite Judge Rakoff’s somewhat understandable harangue over the liability disclaimer issue, he did approve the settlement and consent judgment. Nonetheless, he clearly indicated that he might not approve one of these again under similar circumstances. Undoubtedly, other courts may take note of this issue as well, but it is purely speculative and premature to conclude that SEC settlements without any admission of liability will now go by the wayside. Judge Rakoff contrasted what he perceived as the SEC’s unwarranted complicity with defendants in these cases with the posture of the Department of Justice (DOJ) in similar situations. However, it should be noted that the DOJ operates in the sphere of criminal charges, not civil wrongdoing. Is pleading to a lesser criminal charge than arguably could have been proven by the DOJ any less disingenuous than these liability disclaimers in civil matters before the SEC?

Putting aside whether or not this may be a harbinger of a change in practice, I would certainly agree with the commentators, who have opined that requiring an admission of liability will have a chilling effect upon the willingness of defendants to settle with the SEC. If they do proceed to settle with the SEC with such an admission of liability, it could certainly have an adverse impact on any pending shareholders and other investor litigation involving the same operative facts as before the SEC and where the monetary exposure is likely much higher.

All of this makes for an ever stronger case for insureds and brokers to be sure that they are procuring policies on the market with the narrowest conduct exclusions so that an admission of liability before the SEC does not automatically engender a denial of coverage. Optimal exclusion wording would be substantively similar to the following.

The Insurer shall not pay the portion of Loss in connection with any Claim that is for:

(1) deliberately fraudulent, or deliberately criminal act or deliberately fraudulent or deliberately criminal omission or any deliberate violation of any statute, rule, or law by an Person; or

(2) profit or remuneration gained by any Insured Person to which he or she is not legally entitled.

provided that the foregoing exclusions in this section are determined by a final adjudication, after exhaustion of all appeals (including petitions for rehearing), solely in the underlying Claim and shall not be applicable to that part of Loss, which is comprised of Defense Expenses.

Neither the intent, knowledge nor Wrongful Act of any Insured Person or the Company shall be imputed to any other Insured Person to determine the application of the exclusions set forth in this section. (my emphasis)

Using this wording should obviate any argument that a consent judgment entered into with the SEC could operate to preclude coverage for any parallel private securities class action or derivative litigation.