Four separate lawsuits were recently brought against Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) stemming from the delayed execution by TIAA-CREF of transfer or redemption instructions from investors in certain proprietary funds.
The underlying lawsuits alleged TIAA-CREF would pay the investors the value of the fund shares as of the date of the instructions from the investors, netting any gains or losses between the order date and the execution date with operational expenses and passing it through to the remaining fund investors. The lawsuits were brought by investors whose shares had increased in value between the order date and the sale date, with the investors alleging they were entitled to millions of dollars in gains. The investors sought to recover such amounts from TIAA-CREF as damages.
Coverage for the Loss Was Denied by the Fund’s Insurers
Three of the class actions were ultimately settled and TIAA-CREF sought coverage for the settlement amounts under its insurance policies. Coverage, however, was denied by TIAA-CREF’s insurance carriers for both defense and indemnity – based on the precedent that the settlement payments were disgorgement of undeserved profits, thus uninsurable under law and public policy.
This resulted in TIAA-CREF taking action against its insurers, arguing that any gains or losses resulting from the gap in time between instruction and execution was passed on to other investors, with no direct benefit to itself. Because it did not receive any direct benefit, TIAA-CREF argued that the settlement did not constitute disgorgement and is thus insurable under its insurance policies.
Delaware Supreme Court Overturned the Decision
On July 30, 2018, the Delaware Supreme Court ruled in favor of TIAA-CREF, resulting in over $40 million in coverage from three insurance carriers. The Delaware Supreme Court ruled that the insurability of undeserved profits are dependent on whether or not the defendant was the direct benefactor of such gains. In this case, although TIAA-CREF’s delayed execution may have played a part in the gains being transferred to the other investors, it was not a direct benefactor of such undeserved profits, thus the amounts in question do not constitute disgorgement.
Although a court may include certain amounts as disgorgement in a settlement or judgment, it is apparent that the insurability of such amounts will depend on the specific facts of each event and whether or not the defendant was a direct benefactor of such undeserved profits.
The Hartford Is Prepared
With over 30 years of financial institution experience, The Hartford prides itself on comprehensive coverage to help protect organizations from professional liability exposures. It is imperative to be on the cutting edge of policy wording, as case law is constantly changing our customer’s liability in this ever-evolving space. That is why The Hartford had earlier crafted policy wording, which is aligned to the Delaware Supreme Court ruling by making the following language available to its valued customers:
"The Insurer shall not assert as its sole basis that an Insured’s payment of any restitution or disgorgement for which the Insured is held legally liable as part of a settlement of or judgment in a Claim made by any Regulatory Authority constitutes uninsurable disgorgement or restitution unless an Insured or any of its affiliates, owners or interest holders was the beneficiary or recipient of such amounts subject to the restitution or disgorgement."
Our longevity and experience in the financial institution space provides thoughtful, market-leading enhancements based on legal doctrine and regulatory statutes.