OPINION OF THE COURT
In this insurance dispute arising from the insured's monetary settlement of a Securities and Exchange Commission (SEC) proceeding and related private litigation predicated on the insured's violations of federal securities laws, we conclude that the insurers are not entitled to a CPLR 3211 dismissal of the insured's coverage claims. We therefore reverse and reinstate the insured's complaint.
In 2003, the SEC and other regulatory entities undertook an investigation of Bear Stearns & Co., Inc., a broker-dealer, and Bear Stearns Securities Corp., a clearing firm, for allegedly facilitating late trading and deceptive market timing on behalf of certain customers (predominately large hedge funds) for the purchase and sale of shares in mutual funds.
Nevertheless, Bear Stearns made a formal offer of settlement in November 2005. The SEC accepted the offer and in March 2006 it issued an "Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions" (the SEC order). "Solely for the purpose of these proceedings" and "without admitting or denying the findings," Bear Stearns agreed to pay $160 million as "disgorgement"
The SEC order also set forth detailed findings stating that, between 1999 and 2003, Bear Stearns "facilitated a substantial amount of late trading and deceptive market timing"; "knowingly or recklessly processed thousands of late trades"; "took no steps to alter [its] procedures or to implement effective measures to stop deceptive timing"; "took affirmative steps to hide from mutual funds the identity of customers that were known market timers by, for example, assigning multiple account numbers to customers"; and "knew or [was] reckless in not knowing" that its brokers' use of multiple account numbers for certain customers "would be used for market timing." Based on its role in supporting the late trading and market timing activities of its customers, the SEC found that Bear Stearns "willfully" violated section 17 (a) of the Securities Act of 1933 (see 15 USC § 77q [a]); sections 10 (b) and 15 (c) of the Securities Exchange Act of 1934 (see 15 USC §§ 78j [b]; 78o [c]); and SEC Rules 10b-5 and 22c-1 (a) (see 17 CFR 240.10b-5, 270.22c-1 [a]).
Meanwhile, during the pendency of the SEC matter, Bear Stearns was named as a defendant in a number of private class action lawsuits brought by various mutual funds based on similar late trading and market timing allegations. Following the SEC settlement and the establishment of the $250 million fund, Bear Stearns settled the private actions for $14 million. According to Bear Stearns, it incurred $40 million in defense costs attributable to defending both the SEC proceeding and the private litigation.
Bear Stearns then sought indemnification from its insurers — defendants Vigilant Insurance Company, its primary carrier,
The primary professional liability policy, to which the excess policies follow form, provides that the Insurers are to "pay on behalf of [Bear Stearns] all Loss which [Bear Stearns] shall become legally obligated to pay as a result of any Claim ... for any Wrongful Act of [Bear Stearns]." "Loss" is defined as:
The term "Wrongful Act" under the policy means "any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by [Bear Stearns]." A "Claim" includes both private civil actions as well as investigations and proceedings initiated by governmental bodies or SROs. The Insurers had no separate duty to defend; rather, defense costs expended by Bear Stearns could be recouped if they fell within the definition of Loss. Finally, although the policy contains an exclusion for "deliberate, dishonest, fraudulent or criminal" acts or omissions, it provides that Bear Stearns would remain "protected under the terms of this policy" unless and until a "judgment or other final adjudication" established that Bear Stearns committed such acts or omissions.
After the Insurers denied coverage for all three claims, plaintiffs J.P. Morgan Securities Inc., J.P. Morgan Clearing Corp.
Supreme Court denied the Insurers' dismissal motions, holding that it was unable to conclude, on the basis of the SEC order alone, that the $160 million disgorgement payment was "specifically linked" to Bear Stearns' improperly acquired funds, as opposed to profits that flowed to its customers (2010 NY Slip Op 33799[U], *10 ). The Appellate Division reversed and dismissed the complaint in its entirety, holding that, as a matter of public policy, Bear Stearns could not seek recoupment of the $160 million disgorgement payment (91 A.D.3d 226 [1st Dept 2011]).
Bear Stearns submits that the Appellate Division erred in concluding, as a matter of law, that it could not pursue coverage under its policies for any of the $160 million SEC disgorgement payment. It acknowledges that it is reasonable to preclude an insured from obtaining indemnity for the disgorgement of its own ill-gotten gains, but contends that it was not unjustly enriched by at least $140 million of the disgorgement payment because that portion was attributable to the profits of its customers. In response, the Insurers do not earnestly dispute that the claims fall within the policy's definition of Loss. Rather, they posit that the Appellate Division correctly concluded, for public policy reasons, that Bear Stearns should not be entitled to seek indemnity for the $160 million disgorgement payment because Bear Stearns enabled its customers to make millions through its trading tactics. The Insurers also argue that there is
At the outset, the rules governing CPLR 3211 motions to dismiss are well established. In assessing the adequacy of a complaint under CPLR 3211 (a) (7), the court must give the pleading a liberal construction, accept the facts alleged in the complaint to be true and afford the plaintiff "the benefit of every possible favorable inference" (AG Capital Funding Partners, L.P. v State St. Bank & Trust Co., 5 N.Y.3d 582, 591  [internal quotation marks and citations omitted]). Whether the plaintiff "can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss" (EBC I, Inc. v Goldman, Sachs & Co., 5 N.Y.3d 11, 19 ). And to prevail on a motion to dismiss pursuant to CPLR 3211 (a) (1), the moving party (here, the Insurers) must establish that the documentary evidence "conclusively refutes" the plaintiff's allegations (AG Capital Funding, 5 NY3d at 591).
Analysis of the claims in this action begins with the basic principle that insurance contracts, like other agreements, will ordinarily be enforced as written (see White v Continental Cas. Co., 9 N.Y.3d 264, 267 ). Freedom of contract "is deeply rooted in public policy" (New England Mut. Life Ins. Co. v Caruso, 73 N.Y.2d 74, 81 ). As a result, parties to an insurance arrangement may generally "contract as they wish and the courts will enforce their agreements without passing on the substance of them" (id.; see also Slayko v Security Mut. Ins. Co., 98 N.Y.2d 289, 295  [explaining that courts "are reluctant to inhibit freedom of contract by finding insurance policy clauses violative of public policy"]).
Our cases, however, have recognized two situations in which a countervailing public policy will override the freedom to contract, thereby precluding enforcement of an insurance agreement. First, an insurer may not indemnify an insured for a punitive damages award, and a policy provision purporting to provide such coverage is unenforceable (see Zurich Ins. Co. v Shearson Lehman Hutton, 84 N.Y.2d 309, 316-317 ). The rationale underlying this public policy exception emphasizes that allowing coverage "would defeat the purpose of punitive damages, which is to punish and to deter others from acting similarly" (Home Ins. Co. v American Home Prods. Corp., 75 N.Y.2d 196,
Relying on the findings in the SEC order, the Insurers claim that the latter public policy exception for intentional injury precludes coverage of any of Bear Stearns' claims. The Insurers note that the SEC order determined that Bear Stearns willfully violated numerous federal securities laws through its active facilitation of late trading and market timing activities on behalf of its hedge fund customers. But the public policy exception for intentionally harmful conduct is a narrow one, under which it must be established not only that the insured acted intentionally but, further, that it acted with the intent to harm or injure others (see Public Serv. Mut. Ins. Co. v Goldfarb, 53 N.Y.2d 392, 399  ["Whether such coverage is permissible depends upon whether the insured, in committing his criminal act, intended to cause injury"]). On the limited record before us, we are unable to say, as a matter of law, that this public policy exception clearly bars Bear Stearns' coverage claims. The SEC order, while undoubtedly finding Bear Stearns' numerous securities laws violations to be willful, does not conclusively demonstrate that Bear Stearns also had the requisite intent to cause harm.
The Insurers also maintain — and the Appellate Division agreed — that, on a separate public policy ground, Bear Stearns is not entitled to recover any portion of the $160 million SEC disgorgement payment. Although we have not considered the issue, other courts have held that the risk of being ordered to return ill-gotten gains — disgorgement — is not insurable. Some courts reached this conclusion because, as a matter of contract
Bear Stearns does not disagree with these principles, but urges that they do not prohibit coverage here since the bulk of the disgorgement payment — approximately $140 million — represented the improper profits acquired by third-party hedge fund customers, not revenue that Bear Stearns itself pocketed.
In the context of these dismissal motions, we must assume Bear Stearns' allegations to be true unless conclusively refuted by the relevant documentary evidence, in this case, the SEC order. Contrary to the Insurers' position, the SEC order does not establish that the $160 million disgorgement payment was predicated on moneys that Bear Stearns itself improperly earned as a result of its securities violations. Rather, the SEC order recites that Bear Stearns' misconduct enabled its "customers to generate hundreds of millions of dollars in profits." Hence, at this CPLR 3211 stage, the documentary evidence does not decisively repudiate Bear Stearns' allegation that the SEC disgorgement payment amount was calculated in large measure on the profits of others.
Finally, the Insurers rely on two policy exclusions to bar coverage. One exclusion, applicable to all the Insurers, disclaims coverage for claims "arising out of [Bear Stearns] gaining in fact any personal profit or advantage to which [Bear Stearns] was not legally entitled, including but not limited to any actual or alleged commingling of funds or accounts." Because Bear Stearns alleges, and the SEC order does not conclusively refute, that its misconduct profited others, not itself, this exclusion does not defeat coverage under CPLR 3211. The other exclusion, which relates solely to one excess carrier (Lloyd's), negates coverage for any claim arising from a wrongful act committed before March 21, 2000 (the effective date of the Lloyd's policy) if any officer of Bear Stearns, by that date, "knew or could have reasonably foreseen" that such wrongful act could lead to a claim. But as Supreme Court below noted, "numerous disputed factual assertions remain concerning Bear Stearns' knowledge of the relevant facts prior to March 21, 2000, and whether a person in Bear Stearns' position could have reasonably foreseen that those facts might be the basis of a claim under the Policies" (2010 NY Slip Op 33799[U], *12).
Accordingly, the order of the Appellate Division should be reversed, with costs, and defendants' motions to dismiss the complaint denied.
Order reversed, with costs, and defendants' motions to dismiss the complaint denied.