A federal appeals court in New Orleans ruled Monday that Lloyd’s of London underwriters must, at least for now, pay lawyers defending indicted Texas financier R. Allen Stanford and three other former Stanford executives. The court rejected the London-based insurers’ argument that it could void the directors’ and officers’ insurance coverage on the basis of Stanford Group Co.’s former CFO’s guilty plea to three felony counts last year and the court-appointed receiver’s claim that the business was a Ponzi scheme.

The three-judge panel ordered Lloyd’s to continue paying Stanford’s lawyers until a lower court can formally decide the matter.

On Nov. 16, 2009, the underwriters by letter advised Stanford executives that they would no longer provide coverage under the directors’ and officers’ policy because they had determined, based on the evidence available to them up to that point, that money laundering, as defined by the policy, had occurred. The appeals court, however, noted that although notice to the executives of this determination came in November, the underwriters denied coverage as of Aug. 27, 2009 — the date of CFO James Davis’s guilty plea. “The underwriters contend that each allegation against the executives in the SEC and criminal actions ‘aris[es] directly or indirectly as a result of or in connection with any act . . . of Money Laundering,’” U.S. Appeals Court Judge Patrick E. Higginbotham wrote in the ruling posted on the New Orleans court’s Web site. “The underwriters urge this reading of the policy even though only one of twenty-one counts charged in the criminal action alleges money laundering as defined by law. In doing so, they rely on the policy’s definition of Money Laundering, which is defined to cover much broader conduct than the violation of a money laundering statute.”

The court said its focus has been on the underwriters’ obligation to reimburse defense costs, but the D&O policy also imposes an obligation on the executives to repay those costs if it is determined that they committed acts in connection with money laundering.

“The underwriters are contractually bound to reimburse reasonable defense costs until that merits decision is reached,” Higginbotham wrote. “This conclusion in no way controls the ultimate coverage decision.”

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