MF Global Wins One For Fidelity Insurance Policyholders

In recent times, commercial crime victims have had to add the "direct loss" defense to the simple certainties of death and taxes. Whenever the chain of causation involves more than a perpetrator simply pocketing cash from the company register, the response from a commercial crime or fidelity insurance claim is a reservation of rights or outright denial on direct loss grounds. In other words, insurance companies argue that the loss does not result directly from a covered cause and therefore falls under an exclusion for indirect loss, or that it fails to meet a direct loss requirement in insuring agreements or definitions. The insurance industry's favored formulation that "direct means direct" has succeeded in certain instances involving particularly attenuated facts, but policyholders should know that other courts rightly reject that circular reasoning. The question of what constitutes a direct loss remains a fact-specific problem with ambiguous policy language that should be construed in favor of coverage when more than one interpretation is viable.

A recent high-profile, high-stakes decision by a New York intermediate appellate court bears this out. In New Hampshire Insurance Company v. MF Global, Inc., __ N.Y.S.2d _, 2013 WL 3584068 (N.Y. App. Div., 1st Dep't, July 16, 2013), the Appellate Division of the state Supreme Court unanimously affirmed summary judgment for the policyholder, rejecting an AIG insurance company's direct loss defense in connection with a loss the policyholder had to pay to a third party.

The policyholder, the bankrupt commodity and derivatives broker MF Global, had been compelled by the rules of an exchange on which it traded to transfer approximately $150 million to the exchange's clearinghouse, in order to settle losses on trades in the personal account of a broker associated with one of its offices. When MF Global submitted a claim under fidelity bonds issued by AIG at the primary level and excess bonds that followed form, the insurers denied coverage and sued for declaratory judgment that MF Global did not sustain a "direct financial loss," as required by the bond's definition of covered "Loss." Like many other forms of fidelity or commercial crime policies, the AIG policy also excluded coverage for "indirect or consequential loss."

New York Appellate Decision: Direct Means "Proximate"

The trial court granted summary judgment for the policyholder against the direct loss defense, and the appellate court's...