MBIA Inc. v. Federal Insurance

10-355(L)
MBIA Inc. V. Federal Ins. Co., et al.

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
________________________

August Term, 2010

Argued: March 18, 2011 Decided: July 1, 2011

Docket Nos. 10-0355-cv (L); 10-0386-cv (con);
10-0356-cv (XAP)
________________________

MBIA INC.,

Plaintiff-Appellee-Cross-Appellant,

- v. –

FEDERAL INSURANCE COMPANY and
ACE AMERICAN INSURANCE COMPANY,

Defendants-Appellants-Cross-Appellees.
________________________

Before: SACK, LYNCH, Circuit Judges, and PRESKA, Chief District
Judge.*
________________________

The parties appeal and cross-appeal from a judgment
entered December 30, 2009, in the United States District Court
for the Southern District of New York (Berman, J.), granting in
part and denying in part the motion for summary judgment made by
plaintiff and granting in part and denying in part the motion for
summary judgment made by defendant insurance companies in a
breach of contract action to compel coverage for certain claims
made under directors and officers liability insurance policies.
The district court determined that plaintiff is entitled to
coverage for losses associated with federal and state regulators’
investigations of plaintiff and for losses associated with an
investigation conducted by a special litigation committee after
derivative litigation ensued. It also determined that plaintiff
is not entitled to coverage for losses associated with the cost
of an independent consultant review of two transactions. We
*
The Honorable Loretta A. Preska, of the United States District
Court for the Southern District of New York, sitting by
designation.
AFFIRM the judgment of the district court in part and REVERSE the
judgment in part and REMAND the case for entry of judgment.
________________________

ROBERT H. SHULMAN, Kasowitz, Benson,
Torres & Friedman LLP,** New York,
New York, for Plaintiff-Appellee-
Cross-Appellant.

CHRISTOPHER T. HANDMAN (David J. Hensler
and Jessica L. Ellsworth, on the
brief), Hogan Lovells US LLP,
Washington, D.C., for Defendant-
Appellant-Cross-Appellee Federal
Insurance Co.

ALAN J. JOAQUIN (Janet R. McFadden, on
the brief), Drinker Biddle & Reath
LLP, Washington, D.C., for
Defendant-Appellant-Cross-Appellee
ACE American Insurance Co.
________________________

LORETTA A. PRESKA, Chief District Judge:

This insurance coverage dispute raises three issues

arising out of financial regulators’ investigations into alleged

accounting misstatements by appellee and cross-appellant MBIA,

Inc., (“MBIA”) and related litigation. Based on these events,

MBIA made claims under two $15 million director and officer

(“D&O”) insurance policies it had purchased from appellants and

cross-appellees Federal Insurance Co. (“Federal”) and ACE

American Insurance Co. (“ACE”). It sought coverage for costs

associated with these claims as losses under the policies.

Federal and ACE did not believe they were liable for these

**
The law firm of Howery LLP originally represented MBIA, Inc.,
in this action and is named on the briefs. It dissolved as of
March 15, 2011. Christine S. Davis and Lara A. Degenhart were
listed on the brief.

2
claims, and, unsurprisingly, litigation ensued. Resolving cross-

motions for summary judgment, the district court (Berman, J.)

granted summary judgment in favor of MBIA on two of its three

coverage claims but granted summary judgment in favor of Federal

and ACE on one of MBIA’s coverage claims. We affirm in part and

reverse in part and remand a portion of the case to the district

court for entry of judgment in favor of MBIA.

I. BACKGROUND

MBIA is a Connecticut corporation based in Armonk, New

York. It provides municipalities and other government entities

with financial guarantee insurance for their bonds or structured

finance obligations; this insurance is a guarantee of payment of

principal and interest due. Like many corporations, MBIA

purchased D&O insurance coverage for its directors and officers,

as well as MBIA itself for certain claims. MBIA’s policies were

purchased from Federal and ACE for the period between February

15, 2004, and August 15, 2005, including a six-month extension.

These policies covered “Securities Claims,” which include “a

formal or informal administrative or regulatory proceeding or

inquiry commenced by the filing of a notice of charges, formal or

informal investigative order or similar document.” J.A. at 158.

The policies also cover “Securities Defense Costs,” which include

costs “incurred in defending or investigating Securities Claims.”

Id. The policies also contemplate that should MBIA seek to

invoke coverage, MBIA must give the insurers “the opportunity to

3
effectively associate . . . in the investigation, defense and

settlement” of any claim against MBIA and then seek the insurers’

consent before settling any covered claim or incurring any costs

defending such a claim. Id. at 126. Both policies included $15

million worth of coverage and covered the same claims with the

same terms and conditions except as delineated in the ACE policy.

The coverage was two-tiered: only after the Federal policy limit

was exhausted did the ACE policy provide additional coverage.

Because the two policies and claims are parallel in nearly all

respects, we will refer to Federal and ACE together as the

“insurers” throughout, analyzing the policies together except

where we note that the analysis differs with respect to one of

the insurers.

The purchases proved prescient. As part of a larger

investigation into certain accounting practices in the insurance

industry, federal and state regulators targeted MBIA in November

2004. The Securities and Exchange Commission (“SEC”) had issued

a formal order of investigation on March 9, 2001, ordering an

inquiry into certain companies’ compliance with the securities

laws, their financial recordkeeping, their financial reporting,

and related matters. Specifically, the order initiated a private

investigation into whether the subject companies “engaged, are

engaged, or are about to engage in any of the aforesaid acts,

practices, or courses of business, or in any acts, practices, or

courses of business of similar purport or object.” J.A. at 201.

4
The phrase “acts, practices, or courses of business” refers to

the allegations of financial chicanery mentioned above.

Pursuant to that investigation, the SEC issued the

first of several subpoenas to MBIA on November 12, 2004. The

subpoena did not identify specific transactions, but it compelled

MBIA to produce all documents concerning transactions involving

“Non-Traditional Product[s].” Id. at 212. These were defined

as, in relevant part,

any product or service developed, marketed,
distributed, offered, sold, or authorized for sale
. . . that could be or was used to affect the timing or
amount of revenue or expense recognized in any
particular reporting period, including without
limitation, transferring assets off of a Counter-
Party’s balance sheet, extinguishing liabilities,
avoiding charges or credits to the Counter-Party’s
financial statements, [or] deferring the recognition of
a known and quantifiable loss . . . .

Id. (emphasis added). The subpoena also required production of

MBIA’s accounting treatment of payments in connection with these

transactions and any developmental, training, or promotional

materials for them, among other things. On November 18, 2004,

the New York Attorney General (“NYAG”) followed suit and issued

its first subpoena, which mirrored the SEC’s. Others from both

the SEC and the NYAG followed through late 2004. MBIA produced

documents to both regulators in tandem.

Ultimately, three of MBIA’s transactions came under

regulatory scrutiny. The first transaction was MBIA’s purchase

of reinsurance on its guarantee of bonds issued by a hospital

group owned by Allegheny Health, Education and Research

5
Foundation (“AHERF”). MBIA insured these bonds in 1996, and

AHERF declared bankruptcy in 1998 and defaulted. Facing

approximately $170 million of exposure on its guarantee, MBIA

purchased reinsurance on the AHERF transaction whereby the

reinsurers retroactively agreed to assume MBIA’s already-realized

loss in exchange for a nominal premium. MBIA agreed to give the

reinsurers compensation in the form of future premiums from its

other financial guarantee business yet continued to assume the

risk of default on new loans guaranteed. The aim of this scheme

was to allow MBIA to avoid recognizing a large, one-time

insurance loss by disguising the loss and spreading payment for

it over a longer period of time, increasing its stated earnings.

The subpoenas caused MBIA to produce documents concerning the

AHERF transaction.

Later, in the summer of 2005, at least two other

transactions were subjected to regulatory scrutiny. The first

involved MBIA’s purchase of an interest in Capital Asset Holdings

GP, Inc. (“Capital Asset”), a company that bought delinquent tax

liens. After Capital Asset’s lender choked off funding for its

operations, MBIA provided more capital for the company. Then

MBIA, through a subsidiary, guaranteed Capital Asset’s

securitization of the liens it purchased, thereby transferring

the risk of loss on MBIA’s investment from MBIA to the

subsidiary. These machinations were designed to avoid MBIA’s

recognizing a loss on the Capital Asset deal immediately, instead

6
spreading the loss out over time because of the way the guarantee

was structured.

The second transaction involved MBIA’s guarantee of

securities used to purchase airplanes for US Airways. When US

Airways declared bankruptcy in 2002, rather than wait for a claim

on the guarantee, MBIA foreclosed on the airplanes and treated

this transaction as an “investment,” not an “insurance loss.”

Here again, MBIA took these steps to avoid recognizing a loss.

In the summer of 2005, the SEC and the NYAG considered

issuing additional subpoenas. However, in these instances, MBIA

asked the regulators whether they would accept voluntary

compliance with their demands for records in lieu of subpoenas to

avoid adverse publicity for MBIA. The regulators agreed to those

requests, and MBIA complied with their demands for documents

concerning the Capital Asset and US Airways transactions.

In May 2005, MBIA initiated the claims process by

informing the insurers that it was the target of a regulatory

investigation and by providing them with the subpoenas. MBIA

asked the insurers for their consent to retain counsel and to

incur defense costs. The insurers did not view the subpoenas as

sufficient to trigger coverage but accepted the subpoenas as

notice of a potential claim under the policies. MBIA proceeded

to hire attorneys and defend, respond to, and discuss the

regulatory inquiries.

7
 Nevertheless, in August 2005, the regulators advised

MBIA that they would take action against it for securities law

violations. Apparently, discussions about settling the potential

charges were ongoing because on September 27, 2005, MBIA sought

consent from the insurers to settle with the regulators. MBIA

also met with Federal in person to discuss settlement. By letter

dated October 11, 2005, Federal responded to MBIA and said that

it understood a settlement for the AHERF transaction requiring

payment of approximately $75 million in total to state and

federal regulators was under consideration. Federal stated that

it did not believe a settlement would be covered, but it allowed

MBIA to proceed with settlement, saying that it would not “raise

the lack of its written consent to [the] settlements as a defense

to coverage.” Id. at 1044. Retroactively, ACE took essentially

the same approach in December.

MBIA signed an offer of settlement for both the state

and federal claims on October 28, 2005, but that offer was

preliminary, as the regulators had not completed their

investigation into the Capital Asset and US Airways transactions

at that time. To allow settlement talks to proceed despite this

loose end, MBIA and the regulators agreed that an independent

consultant, paid by MBIA, could complete a review of those

transactions and report on a proposed remedy if misconduct was

uncovered. MBIA first informed the insurers of this development

in September 2006. Meanwhile, the independent consultant had

8
begun work. MBIA offered an assurance of discontinuance to the

NYAG in November 2005 that would result in MBIA’s payment of a

$15 million civil penalty and $10 million in disgorgement upon

acceptance by the New York Superintendent of Insurance. By

December 2006, the SEC and MBIA reached an agreement in principle

under which MBIA would pay a $50 million civil penalty for the

AHERF transaction. Both offers of settlement to regulators

contained a provision for an independent consultant review of the

two outstanding investigations. The settlements were executed

and accepted by both regulators in late January 2007.

Ultimately, the independent consultant exonerated MBIA of any

wrongdoing for the Capital Asset and US Airways transactions.

The investigations were closed in 2007.

After these investigations came to light, lawsuits

against MBIA alleging financial wrongdoing were filed. Two

actions are relevant here, one filed in the United States

District Court for the Southern District of New York and one

filed in the New York Supreme Court. On the way to filing suit,

two shareholders sent separate demand letters to MBIA asking the

board to file suit against directors and officers for the alleged

wrongdoing being investigated by regulators at the time. In due

course, MBIA set up a committee of independent directors (the

“Demand Investigation Committee” or “DIC”) to investigate these

demands.1 MBIA did not act on the shareholder demands, which is

1
The policies contain a separate $200,000 sublimit for costs
(continued...)

9
effectively a rejection of the demand under governing Connecticut

law, but the shareholders persisted and filed two derivative

lawsuits. When the lawsuits were filed, MBIA reconstituted the

DIC as the “Special Litigation Committee” (“SLC”) to determine

whether maintaining these suits was in the best interests of

MBIA. The SLC determined, after an investigation by outside

counsel hired by the SLC, that it was not and filed a motion to

dismiss the complaints. The lawsuits were terminated.

Following all of this turmoil, Federal agreed to pay

approximately $6.4 million to cover losses from the SEC’s AHERF

transaction investigation and related lawsuits, including

$200,000 for the DIC’s investigation. But it refused to cover

losses related to the Capital Asset and US Airways transactions

and to the NYAG’s AHERF transaction investigation. Because the

Federal policy limit was not breeched, ACE paid nothing. MBIA

disagreed with the insurers’ interpretation of what the policies

covered. It filed suit to compel the insurers to cover costs

related to (1) both regulators’ investigations of all three

transactions, (2) the independent consultant’s investigation

pursuant to the settlement, and (3) the work of the SLC. The

district court granted summary judgment in favor of MBIA with

respect to costs related to the investigation of the transactions

and the costs incurred by the SLC. MBIA, Inc. v. Fed. Ins. Co.,

1
(...continued)
related to the investigation of shareholder demands. J.A. at
167. No one argues that Federal should not have applied this
limit to its coverage for costs incurred by the DIC.

10
No. 08 Civ. 4313, 2009 WL 6635307, at *7-9 (S.D.N.Y. Dec. 30,

2009). It granted summary judgment in favor of the insurers,

however, with respect to costs related to the independent

consultant’s investigation. Id. at *8-9. These appeals

followed.

II. ANALYSIS

The applicable law is straightforward. We review de

novo the district court’s grant of summary judgment. Costello v.

City of Burlington, 632 F.3d 41, 45 (2d Cir. 2011). In so doing,

we construe the facts in the light most favorable to the

nonmoving party and, drawing all reasonable inferences in its

favor, affirm when “‘there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter

of law.’” Id. (quoting Fed. R. Civ. P. 56(a)).

In this diversity case, the issues are governed by

either New York or Connecticut state law. See Wilson v. Nw. Mut.

Ins. Co., 625 F.3d 54, 60 (2d Cir. 2010). We need not make a

choice-of-law determination because under both states’ regimes,

the applicable legal principles are aligned. An insurance

contract is interpreted under ordinary common-law contract

principles, and we “give effect to the intent of the parties as

expressed in the clear language of the contract.” Morgan Stanley

Grp., Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000)

(internal quotation marks omitted) (applying New York law);

11
accord Griswold v. Union Labor Life Ins. Co., 442 A.2d 920, 923

(Conn. 1982). We agree with the district court and the parties

that the contract is unambiguous, so the plain meaning of its

terms control. Cont’l Ins. Co. v. Atl. Cas. Ins. Co., 603 F.3d

169, 180 (2d Cir. 2010). In the end, the insured bears the

burden of showing that an insurance coverage covers the loss, but

the insurer bears the burden of showing that an exclusion applies

to exempt it from covering a claim. Morgan Stanley Grp., 225

F.3d at 276 & n.1. Doubts are resolved in favor of the insured.

See id. at 276.

On appeal, the insurers argue that the district court

erred in two ways. First, they argue that it erred because both

the SEC’s and the NYAG’s investigations into the Capital Asset

and US Airways transactions are not covered “Securities Claim[s]”

under the policies and because the NYAG’s investigation of the

AHERF transaction is likewise not covered. Second, they argue

that it erred because costs incurred by the SLC were either not

covered or subject to the $200,000 policy sublimit. In its

cross-appeal, MBIA argues that the district court erred in its

analysis denying it coverage for the costs of the independent

auditor. We address these arguments sequentially.

A. Investigation Costs Coverage

The insurers’ first argument involves the scope of

coverage provided in Insuring Clause 3, which states: “The

Company [i.e., the insurers] shall pay on behalf of any

12
Organization [i.e., MBIA and subsidiaries] all Securities Loss

for which it becomes legally obligated to pay on account of any

Securities Claim first made against it during the Policy Period

. . . .” A “Securities Claim” is defined as, in relevant part,

“a formal or informal administrative or regulatory proceeding or

inquiry commenced by the filing of a notice of charges, formal or

informal investigative order or similar document.” J.A. at 158.

The question here is whether the expenses claimed in connection

with the regulators’ investigations fall within this definition.2

To answer this question, we analyze the various items MBIA argues

are “Securities Claims”: the NYAG’s investigation of the AHERF

transaction and the SEC’s and the NYAG’s investigation of the

Capital Asset and US Airways transactions. We proceed in that

order.

1. The NYAG Investigation of AHERF

We agree with the district court that the NYAG’s

subpoena on the AHERF transaction was a “Securities Claim.”

Under New York law, the NYAG may commence an investigation when,

in his discretion, “he believes it to be in the public interest

that an investigation be made.” N.Y. Gen. Bus. Law § 352(1).

The outward-facing form that investigation takes is the service

of a subpoena, which, on its face, commands the production of

documents and threatens criminal penalties for noncompliance.

See, e.g., People v. Thain, 874 N.Y.S.2d 896, 899 (N.Y. Sup. Ct.

2
The parties do not dispute that the costs claimed would be
“Securities Loss[es]” as defined in the policies.

13
2009) (stating that the NYAG may require information pursuant to

the investigation and “[t]o that end, he is empowered to subpoena

witnesses” and documents (internal quotation marks omitted));

Sanborn v. Goldstein, 118 N.Y.S.2d 63, 64 (N.Y. Sup. Ct. 1952)

(stating that the NYAG “commenced an investigation pursuant to

[the Martin Act] . . . by service of a subpoena upon plaintiff”);

see also N.Y. Gen. Bus. Law § 352(4). Backed by the enforcement

authority of the state, the NYAG subpoena is at least a “similar

document” to a “formal or informal investigative order” that

commenced a regulatory proceeding, as stated in the policies.

Moreover, we agree with the district court’s sensible

intuition that a businessperson “would view a subpoena as a

‘formal or informal investigative order’ based on the common

understanding of these words.” MBIA, Inc., 2009 WL 6635307, at

*6 (internal quotation marks omitted). In any event, the

subpoena is, at absolute minimum, a “similar document” to those

listed the definition of a “Securities Claim” because it is

similar to other forms of investigative demands made by

regulators. See, e.g., ACE Am. Ins. Co. v. Ascend One Corp., 570

F. Supp. 2d 789, 796 (D. Md. 2008) (subpoenas may constitute

insurance claims when issued by a governmental investigative

agency).

We reject the insurers’ crabbed view of the nature of a

subpoena as a “mere discovery device” that is not even “similar”

to an investigative order. The New York case law makes it

14
crystalline that a subpoena is the primary investigative

implement in the NYAG’s toolshed. We also reject the insurers’

argument that because the definition does not include a

proceeding commenced by the service of a subpoena, a subpoena is

not included. This reading puts form over substance; the fact

that the definition does not say “service of a subpoena” is not

dispositive.

Because the plain-language understanding of a

“Securities Claim” includes this subpoena, “Securities Loss”

arising from this investigation is covered.

2. Capital Asset and US Airways Transactions

We now turn to whether “Securities Loss” in connection

with the Capital Asset and US Airways transactions is covered.

This determination turns on two factors: whether the SEC’s

investigation of these transactions was within the scope of its

formal order and whether the NYAG’s similar investigation was

within the scope of its AHERF investigation, which is a covered

“Securities Claim.” We begin with the SEC investigation.

a. The SEC Investigation

The text of the SEC’s formal order stated that the SEC

was empowered to investigate whether AIG and other insurance

companies, including MBIA, engaged in securities fraud,

accounting misstatements, reporting misstatements, or other

“acts, practices, or courses of business of similar purport or

object.” J.A. at 201. The district court held that the

15
investigation into these two transactions was an investigation of

a “course[] of business of similar purport or object” and, thus,

within the scope of the formal order. We agree.

As we described, the three transactions at issue here

all involved MBIA’s attempts not to report or to delay reporting

a loss. The subpoena that accompanied the formal order stated

that the SEC sought documents involving transactions designed to

“affect the timing or amount of revenue or expense recognized,”

including “extinguishing liabilities,” and “deferring the

recognition of a known and quantifiable loss.” Id. at 212.

Although the mechanics MBIA employed in each of the three

transactions differed somewhat (as we described above), there can

be no doubt that all of them involved efforts to delay, reduce,

or eliminate the reporting of a loss, precisely as described in

the subpoena. Indeed, the AHERF transaction involved an attempt

not to book a loss at all, the Capital Asset transaction involved

an attempt to spread the recognition of a loss out over time, and

the US Airways transaction involved an effort to avoid booking a

loss (and, in fact, to represent that MBIA was making an

investment in the airplanes it repossessed). These courses of

business fall within the scope of the transactions for which

documents were subpoenaed by the SEC as “Non-Traditional

Product[s].” This circumstance is highly probative of the scope

of the investigation authorized by the SEC’s formal order.

16
 The formal order authorized the SEC to investigate

“any” of the broadly described acts and courses of business

listed in the formal order. Combined with the specific

definition of the items subpoenaed by the SEC, we conclude that

the plain meaning of the formal order includes these transactions

within its scope because they involved a course of business “of

similar purport or object” to that described in the formal order.

Cf. RNR Enters., Inc. v. SEC, 122 F.3d 93, 98 (2d Cir. 1997)

(concluding that a formal order predating company under

investigation included the company because of similarly inclusive

wording).

The insurers essay several reasons why they think the

formal order does not include the Capital Asset and US Airways

transactions. First, they point to the caption of the SEC’s

formal order, “In re Loss Mitigation Insurance Products,” to

argue that this phrase delimits the scope of the SEC’s

investigation to a certain sub-class of financial transactions.

This argument is unpersuasive. We do not doubt that “[t]he

purposes of such an order seem to be to define the scope of the

ensuing investigation and to establish limits within which the

staff may resort to compulsory process.” SEC v. Jerry T.

O’Brien, Inc., 467 U.S. 735, 738 n.1 (1984). But the caption

alone does not serve these functions; the whole order does. The

only place this phrase occurs is in the caption to the formal

order, and the operative language contains no limitation in scope

17
to a certain “product,” nor does it appear to contemplate such a

limitation. Instead, it announces a broad but definite

investigatory scope that includes these transactions as we

described. In this way, it is quite telling that the actual

subpoenas issued cover allegations involved in the Capital Asset

and US Airways transactions. And SEC subpoenas are enforceable

only when they request “reasonably relevant” information in

connection with the investigation. RNR Enters., 122 F.3d at 97

(quoting United States v. Morton Salt Co., 338 U.S. 632, 652

(1950)); see H.R. Rep. No. 96-1321, pt. 1, pt. 2 (1980),

reprinted in 1980 U.S.C.A.A.N. 3874, 3889. In short, the caption

to the formal order does not operate in the way advanced by the

insurers here to narrow the scope of the SEC’s investigatory

authority as set out in the text of the order. Cf. RNR Enters.,

122 F.3d at 97 (deferring to SEC’s determination of relevance in

challenge to subpoena by measuring value of information against

“general purposes of the agency’s investigation”).

The insurers next argue that these investigations were

conducted by way of oral request rather than subpoena or other

formal process. This argument is meritless. The investigation,

oral or by way of subpoena, was connected to the formal order.

The sole reason the SEC did not issue subpoenas is that MBIA

requested this procedure, and the SEC believed that MBIA would

fully comply on a voluntary basis. The insurers cannot require

that as an investigation proceeds, a company must suffer extra

18
public relations damage to avail itself of coverage a reasonable

person would think was triggered by the initial investigation.

The insurers also argue that the SEC began

investigating these transactions because it was “tipped off” by a

disenchanted investor in Capital Asset and by New York insurance

regulators questioning the US Airways transaction. Whatever the

accuracy of this assertion, we fail to see how the SEC’s

investigative source is relevant to the coverage determination.

Finally, the insurers argue that because the SEC

official who made the oral requests was not named on the formal

order, the requests were not pursuant to that order. This

argument, too, fails. The individuals named on the formal order

are empowered to compel testimony, Jerry T. O’Brien, 467 U.S. at

737-38, but the investigation authorized by the formal order need

not be pursued only by those individuals. In addition, this

policy provides coverage for “informal investigative orders,” and

the oral inquiries fit that description.3

As with the AHERF transaction, the SEC’s investigation

of the Capital Asset and US Airways transactions was commenced by

the SEC’s formal order. MBIA’s “Securities Loss” related to

3
Similar policies that have engendered litigation do not include
coverage for “informal” investigations. E.g., Capella Univ.,
Inc. v. Exec. Risk Specialty Ins. Co., 617 F.3d 1040, 1043 (8th
Cir. 2010) (coverage for “formal investigation”); Med. Mut. Ins.
Co. of Me. v. Indian Harbor Ins. Co., 583 F.3d 57, 61 n.3 (1st
Cir. 2009) (same); Cmty. Found. for Jewish Educ. v. Fed. Ins.
Co., 16 F. App’x 462, 465 (7th Cir. 2001) (unpublished) (same).

19
responding to it is therefore covered because the investigation

was pursuant to a “formal or informal investigative order.”

b. The NYAG Investigation

Our analysis of MBIA’s claim for coverage for

“Securities Loss” related to the NYAG’s investigation of the

Capital Asset and US Airways transactions proceeds similarly. By

the time the NYAG’s office began looking into these transactions,

its AHERF investigation was already underway. The NYAG’s

subpoena contained the same definition of “Non-Traditional

Product[s]” as the SEC’s subpoena, so documents relating to these

transactions were included in its scope. As with the SEC’s

investigation, MBIA requested that the NYAG issue no further

subpoenas after the AHERF subpoena, promising that MBIA would

comply fully with all demands. The NYAG agreed, like the SEC, to

this procedure and continued its investigation with oral

requests. Therefore, for the same reasons that “Securities Loss”

related to the SEC’s investigation into the Capital Asset and US

Airways transactions is covered, such loss related to the NYAG’s

investigation into these transactions also is covered.

3. Summary

For the reasons stated above, MBIA’s “Securities Loss”

related to (1) the NYAG’s investigation into the AHERF

transaction and (2) both the SEC’s and the NYAG’s investigations

into the Capital Asset and US Airways transactions is covered

under the policy. Each of the investigations was commenced by a

20
“formal or informal investigative order or similar document” and

is therefore a “Securities Claim.”

B. Derivative Litigation Coverage

Turning to the insurers’ second contention, the costs

incurred by the SLC in terminating the derivative litigation were

covered “Defense Costs” (or “Securities Defense Costs”) under the

policies. The policies provide coverage (under Insuring Clauses

2 and/or 3) to MBIA and/or its directors for expenses incurred in

defending or investigating claims (including “Securities

Claims”). J.A. at 131, 158. A claim includes a lawsuit. Id.

The insurers argue that the SLC-related costs are not

covered for three main reasons. First, they say that the costs

were incurred by the SLC (and not MBIA or any individual

directors) and that the SLC is not an “Insured Person.”4 Second,

they focus on the nature of a derivative suit to say that

granting MBIA coverage for the SLC’s role would render the

$200,000 sublimit for demand investigation costs superfluous.

See supra note 1. Third, they rely on exclusions from the

definition of “Loss.” We conclude that the costs are covered.

We begin with the anatomy of a derivative action.

Connecticut law applies here because the suits alleged state

claims against MBIA, a Connecticut corporation. Halebian v.

4
An “Insured Person” is defined as “any past, present or future
duly elected director or duly elected or appointed officer of
[MBIA].” J.A. at 131. The definition also includes MBIA itself
in providing coverage for “Securities Loss.” Id. at 157-58.

21
Berv, 590 F.3d 195, 206 (2d Cir. 2009); May v. Coffey, 967 A.2d

495, 501 n.6 (Conn. 2009). In Connecticut, shareholders must

perform two distinct steps to initiate a derivative suit. See

Stutz v. Shepard, 901 A.2d 33, 36 n.5 (Conn. 2006). First, a

disenchanted shareholder must make a demand on the corporation

“to take suitable action.”5 Conn. Gen. Stat. Ann. § 33-722.

Then, after one of three events, the shareholder may commence a

derivative suit: (1) the passing of ninety days without any

action by the corporation, (2) notification that the

shareholder’s demand is rejected, or (3) a showing that

irreparable injury would follow if the court waited for the

ninety-day period to expire. Id.

Connecticut law also provides that a corporation may

form a committee of independent directors to determine whether

maintaining a derivative action is in the best interests of the

corporation. Id. §§ 33-605, 33-724; Frank v. LoVetere, 363 F.

Supp. 2d 327, 333 (D. Conn. 2005). If that committee determines

“in good faith, after conducting a reasonable inquiry upon which

its conclusions are based,” that maintaining the suit is not in

the best interests of the corporation, it has the authority to

move for dismissal. Conn. Gen. Stat. Ann. § 33-724(a). On such

a motion, the court “shall” dismiss the lawsuit. Id.

5
Because this case involves a situation where demands were made
on the board, we do not address demand futility. See Joy v.
North, 692 F.2d 880, 887-88 (2d Cir. 1982); Sheehy v. Barry, 89
A. 259, 261 (Conn. 1914).

22
 Here, both shareholders followed the two-step process

and made a demand before filing suit. Ultimately, after the DIC

performed its work, MBIA did not act within the ninety-day period

provided by Connecticut law. Thereafter, the shareholders took

the next step and filed lawsuits. MBIA formed the SLC to

determine MBIA’s response to this litigation, and the SLC decided

to terminate the litigation. The SLC entered appearances for

MBIA and filed motions to dismiss on its behalf in both the state

and federal cases. The federal suit was voluntarily dismissed

pursuant to Rule 41 of the Rules of Civil Procedure before the

court could rule on it; the parties do not dispute that the state

court action was also terminated, although the record does not

indicate in precisely what manner.

Connecticut law allows this procedure. The board may

terminate derivative litigation by a majority vote of either of

two sub-units of the board: (1) the independent directors if they

constitute a quorum or (2) a committee composed of at least two

independent directors. Id. §§ 33-605, 33-724(b). “A

corporation, possessing an identity only in a legal sense,” can

act only through its agents. In re Payroll Express Corp., 186

F.3d 196, 207 (2d Cir. 1999). That Connecticut law permits the

board to terminate a derivative suit is an extension of the

fundamental principle that the management and ownership of a

corporation are divided, with management undertaken by the board.

Conn. Gen. Stat. Ann. § 33-735(b). In other words, corporate

23
powers and management are exercised by agents “under the

authority of” or “under the direction of” the board. Id. The

SLC was one way MBIA exercised its powers. See, e.g., id. § 33-

724(a); Zapata Corp. v. Maldonado, 430 A.2d 779, 785 (Del. 1981)

(“[A]n independent committee possesses the corporate power to

seek the termination of a derivative suit.”); Revised Model Bus.

Corp. Act § 7.44 official cmt. (citing Aronson v. Lewis, 473 A.2d

805, 813 (Del. 1984), overruled on other grounds by Brehm v.

Eisner, 746 A.2d 244 (Del. 2000)).6

Dismissal of the suits was MBIA’s decision, undertaken

pursuant to the powers granted to MBIA under Connecticut law,

Conn. Gen. Stat. Ann. § 33-724(a), and exercised by the SLC as

permitted under Connecticut law, id. § 33-724(b)(2). See also

Aronson, 473 A.2d at 813 (stating that, ultimately, the board

“retains its . . . managerial authority to make decisions

regarding corporate litigation”). We thus reject the insurers’

suggestion that the SLC was not an “Insured Person.”

6
Because Connecticut law on certain derivative litigation issues
is not particularly well developed, Frank, 363 F. Supp. 2d at
334, we look to the Revised Model Business Corporations Act
(“RMBCA”), on which the Connecticut statute is based, and
Delaware law to elucidate fundamental principles, not substantive
rules, because those principles bear on these issues. We are
aware that Delaware law does not control and do not in any way
suggest that it supplies the rule of decision. May, 967 A.2d at
501 n.6. Nevertheless, Delaware jurisprudence is useful in
discussing general principles. RMBCA § 7.44 official cmt., pt. 2
(stating that the relevant section of the statute “is similar in
several respects . . . to the law as it has developed in
Delaware” but noting certain procedural differences).

24
 To counter this reasoning, the insurers argue that the

SLC was required to operate independently of MBIA. They

postulate that this circumstance means that the SLC took on an

identity and exercised powers separate and apart from those

granted to MBIA. This is argument by sleight of hand.

Connecticut law — and corporation law generally — requires that

the decision to proceed with or terminate derivative litigation

be made by independent directors to satisfy their fiduciary

duties. Conn. Gen. Stat. Ann. § 33-724(a)-(b); see, e.g.,

Aronson, 473 A.2d at 811-12, 814. “Independent” in this context

means independence of judgment — a lack of conflicts of interest.

See Conn. Gen. Stat. Ann. § 33-605; Frank, 363 F. Supp. 2d at

333; see also RMBCA § 1.43 official cmt. (stating that such

directors must be “disinterested” and “independent” so as to

avoid a “likelihood that that director’s objectivity will be

impaired”). Independence of judgment does not generate a new

source of authority to terminate derivative litigation; that

authority is still exercised by the corporation, which can act

only through its agents. Aronson, 473 A.2d at 813; see Conn.

Gen. Stat. Ann. § 33-724(a)-(b); Frank, 363 F. Supp. 2d at 333,

335 (“[A] corporation should be free to determine in its own

business judgment whether litigation is in its best interest

. . . .”). We do not agree with the insurers’ characterization

of the SLC’s “independence.”

25
 The insurers’ second argument relies on the nature of a

derivative suit. Relying on the precept that an interpretation

rendering a contract term superfluous is “disfavor[ed],” Int’l

Multifoods Corp. v. Comm’l Union Ins. Co., 309 F.3d 76, 86 (2d

Cir. 2002), the insurers say that because the SLC investigates

whether to maintain a derivative suit, coverage of the SLC’s

costs would eviscerate the sublimit applicable to the

investigation of shareholder demands. We disagree.

The $200,000 sublimit provides that the insurers’

“maximum liability for all Investigation Costs covered under

Insuring Clause 4 on account of all Shareholder Derivative

Demands . . . shall be $200,000.” J.A. at 167. Insuring Clause

4 states:

The [insurer] shall pay on behalf of [MBIA] all
Investigation Costs which [MBIA] becomes legally
obligated to pay on account of any Shareholder
Derivative Demand first made during the Policy Period
. . . for a Wrongful Act committed, attempted, or
allegedly committed or attempted, by an Insured Person
before or during the Policy Period.

Id.

In this instance, the insurers’ argument requires that

the $200,000 sublimit operate as an exclusion of coverage. They

therefore “bear[] the burden of proving that the claim falls

within the scope of an exclusion.” Vill. of Sylvan Beach v.

Travelers Indem. Co., 55 F.3d 114, 115 (2d Cir. 1995) (citing

Maurice Goldman & Sons, Inc. v. Hanover Ins. Co., 607 N.E.2d 792,

793 (N.Y. 1992)). To do so, the insurers must show that the

26
policies, in “clear and unmistakable language,” exclude coverage.

Id. (internal quotation marks omitted). Bearing in mind that we

must read a contract “as a whole” and construe terms in context,

Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d

458, 467-68 (2d Cir. 2010), we conclude that the insurers do not

meet this burden.

The policies’ structure and terms track the statutory

shareholder grievance process. Insuring Clause 4, with its

concomitant $200,000 sublimit, by its terms applies to costs

related to investigating “Shareholder Derivative Demands,” which

involves the first step in Connecticut’s regime. But when a

demand is rejected and the shareholders file a derivative suit in

court, the application of Insuring Clause 4 to further

investigative costs is less obvious. At best, to cover such

costs, the language “on account of any Shareholder Derivative

Demand” would have to be expanded to include the second stage of

the Connecticut process, a lawsuit. At that stage, however,

Insuring Clause 2 or 3 squarely applies because both provide

coverage for costs “incurred in . . . investigating” “Claims” or

“Securities Claims,” respectively, each of which is defined

expressly to include lawsuits. J.A. at 131, 158. Thus, either

or both of Insuring Clauses 2 and/or 3 certainly provide coverage

at the lawsuit stage. This view of the policies makes sense

because their structure and terms mirror the two-stage

shareholder grievance process of the Connecticut statute:

27
Insuring Clause 4 specifically references a shareholder

derivative demand, while Insuring Clauses 2 and 3 specifically

reference lawsuits.7 Irrespective of whether the language of

Insuring Clause 4 bridges the gap between the demand stage and

the litigation stage of a shareholder grievance — a question on

which we take no view — we find certainty in saying only that the

insurers have not met their heavy burden to show that the

exclusion, as it operates here, applies.

Finally, the insurers attempt to rely on the policies’

exclusion of “any amount incurred by [MBIA] (including its board

of directors or any committee of the board of directors) in

connection with the investigation or evaluation of any Claim or

potential Claim by or on behalf of [MBIA]” from the definition of

“Loss.” J.A. at 144. Here, the insurers bear the burden to

“establish that the exclusion is stated in clear and unmistakable

language, is subject to no other reasonable interpretation, and

applies in the particular case.” Cont’l Cas. Co. v. Rapid-Am.

Corp., 609 N.E.2d 506, 512 (N.Y. 1993). The insurers do not

carry this heavy burden in this case.

7
The formation of an SLC is far from an aberration. E.g.,
Strougo v. Bassini, 282 F.3d 162, 167 n.3 (2d Cir. 2002) (SLC
formed to investigate shareholder derivative suit); Stutz, 901
A.2d at 37 (same); In re Comverse Tech., Inc., 866 N.Y.S.2d 10,
17 (N.Y. App. Div. 2008) (same); see also, e.g., In re Am. Int’l
Grp. Inc. Consol. Derivative Litig., 976 A.2d 872, 881 n.13 (Del.
Ch. 2009) (same). The insurers know how corporations evaluate
derivative litigation and could have written the contract to
contemplate exactly this situation. Indeed, the specific
attention given in the policies to the demand investigation
portion of this process suggests that the parties knew how to
contract about costs related to the SLC.

28
 To avail themselves of this exclusion, the insurers

primarily rely on the procedural fact that MBIA is a plaintiff in

the caption of the cases because the lawsuits, which are

“Claims,” were filed “on behalf of” MBIA. But MBIA is named as a

nominal defendant in the caption of these derivative actions as

well. This situation is unsurprising because, in a derivative

suit, the “corporation is in an anomalous position of being both

a defendant and a plaintiff in the same action.”8 Ma'Ayergi &

Assocs., LLC v. Pro Search, Inc., 974 A.2d 724, 728 (Conn. App.

Ct. 2009). Thus, the insurers’ reliance on the “on behalf of”

language provides only equivocal support for their position.

Moreover, we think that the exclusion in the definition of “Loss”

is not clearly applicable to the costs incurred by the SLC

because those costs were, at least to some extent, related to

litigation, not investigation. In sum, we are not persuaded that

MBIA has carried its burden to show that this exclusion applies.

The costs incurred by the SLC are covered under the

policies.

C. Independent Consultant Coverage

The final issue remaining is whether the costs of the

independent consultant are covered. MBIA informed the insurers

in September 2005 of settlement discussions requiring payment of

8
This awkward procedural posture is an accident of history. The
derivative suit evolved from equity, where two suits were
brought, one against the corporation to compel action and the
other against the individual officers and directors for alleged
malfeasance. This procedure evolved into a single action. See
generally Ross v. Bernhard, 396 U.S. 531, 537-39 (1970).

29
approximately $75 million in disgorgement and penalties. Because

the regulators had not completed their investigation into the

Capital Asset and US Airways transactions, in October 2005, they

asked MBIA to add an independent consultant (“IC”) review of

those transactions as a condition of any settlement. MBIA would

pay for this review, which increased the costs of the total

settlement. While MBIA made settlement overtures during this

time, settlement itself remained tentative.

The IC began work in mid-2006, and the insurers were

first notified of the addition of the IC in September 2006. In

October 2006, the insurers and MBIA again discussed settlement

proposals under consideration, including the regulators’

insistence on an IC review. On December 6, 2006, MBIA sent the

insurers copies of its settlement offer. Any settlement was

still unconsummated.

Then, on December 15, 2006, MBIA gave the regulators

its final offer of settlement, which the regulators accepted in

late January 2007. The SEC issued a cease-and-desist order on

January 29, 2007, and the NYAG finalized an assurance of

discontinuance with MBIA on January 25, 2007. These events

marked a final settlement, and MBIA reported the investigations

and settlements to the public shortly thereafter. MBIA Inc.,

Current Report (Form 8-K) (Jan. 31, 2007). In July 2007, the IC

issued a report exonerating MBIA from wrongdoing with respect to

30
the Capital Asset and US Airways transactions. This event

officially ended the regulators’ investigations.

The district court held that the addition of the IC in

the course of settlement discussions breached the “right to

associate” clause in the policies and that IC-related costs are

therefore not covered. MBIA, Inc., 2009 WL 6635307, at *8-9.

Having considered the parties’ nuanced and multifaceted arguments

on appeal, we appreciate the difficult question the district

court faced on this point. Ultimately, however, we take a

different view and conclude that the IC costs were covered.

We begin with the “right to associate” clause, which

states in Federal’s policy:

[Federal] shall have the right and shall be given the
opportunity to effectively associate with [MBIA] in the
investigation, defense and settlement, including but
not limited to the negotiation of a settlement, of any
Claim that appears reasonably likely to be covered in
whole or in part by this Policy.

J.A. at 126. ACE’s policy contains similar language: “[ACE]

shall have the right, but not the duty, and shall be given the

opportunity to effectively associate with the insureds in the

investigation, settlement or defense of any Claim, even if

[Federal’s] Underlying Limit has not been exhausted.” Id. at

188. As the policy language indicates, these policies required

MBIA to give the insurers the opportunity to associate in

settlement discussions.

MBIA argues that it notified the insurers of a proposed

settlement and invited them to associate, in compliance with both

31
“right to associate” clauses, by its September 27, 2005, letter

seeking consent to settle the regulators’ investigations.9 See

J.A. at 400, 1042, 1091, 1097. MBIA also points to settlement

discussions with the insurers throughout the settlement offer

process as indications that it complied with the “right to

associate” clause. The insurers counter that although MBIA

informed them of a proposed settlement of $75 million, it

breached the “right to associate” clause when it failed to inform

them until September 2006 of the addition of the IC to the

settlement proposals.

The purpose of the “right to associate” clause is to

provide the insurer with an “option to intervene” in the defense

and settlement of a claim. See Mut. Ins. Co. v. Murphy, 630 F.

Supp. 2d 158, 166-67 (D. Mass. 2009); see also Christiania Gen.

Ins. Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 277 (2d

Cir. 1992) (describing right to associate as “opportunity”);

Outboard Marine Corp. v. Liberty Mut. Ins. Co., 536 F.2d 730, 736

(7th Cir. 1976) (describing right to associate as an “option”).

To “associate” means to “come together as partners . . . or

allies.” Webster’s Third New International Dictionary 132

(1986). This right thus allows the insured and the insurer to

come together as partners in investigating, defending, or

settling a claim. That partnership can be useful to an insured,

9
We note that in an otherwise well-briefed appeal, no party put
this quite relevant letter into the record. We must rely on
inferences from e-mail correspondence referencing and sending the
letter and the insurers’ responses to it.

32
who may lack the expertise and experience of an insurer, where,

as here, the insured bears the duty to defend. See Outboard

Marine, 536 F.2d at 736.

Of course, providing the insurer with sufficient notice

of the claim allows it to meaningfully exercise its option. See

Christiania, 979 F.2d at 277. However, the right to associate is

useful only if the insurer can use its experience throughout the

process, not just at the end stages. The policies read as such.

They provide, in the present tense, for an “opportunity to

effectively associate with [the insured] in the investigation,

defense and settlement” of a claim. J.A. at 126. Indeed, the

Federal policy underscores this point by stating explicitly that

the right to associate applies to “the negotiation of a

settlement.” Id.

These principles lead us to conclude that MBIA

fulfilled its obligations under the policies’ “right to

associate” clauses. It provided sufficient notice of the claims

involved in settlement discussions early enough in the process to

allow the insurers to exercise their option to associate

effectively. Where the insured gives the insurer an invitation

to associate with adequate information about the claim under

consideration for settlement, the insured has done what is

required under this clause. This is not to say that the right to

associate is a one-shot opportunity, but it is not the insured’s

duty to return to the nonparticipating insurer each time

33
negotiations about the same claim take a new twist and ask if the

insurer still wants to opt out. In short, the insured can take

the insurer’s RSVP at face value.

That is what MBIA did here. It gave the insurers an

opportunity to join with it in resolving the regulators’

investigations, but the insurers declined to participate. To

give the insurers the opportunity to exercise their right

effectively, as it must, MBIA notified the insurers of a

potential claim long before settlement was discussed. It

informed the insurers of the nature of the claims and provided an

estimate of the monetary amount of those claims. It also met

with Federal in person to discuss possible settlements. After

the insurers declined to participate in settlement negotiations,

MBIA proceeded to negotiate settlements itself.

As it turned out, the settlements exceeded MBIA’s $75

million estimate and included a different type of costs in the

form of IC expenses, as opposed to merely disgorgement and

penalties provided in the settlement offers. But the IC review

was not a standalone or separate claim about which MBIA had to

invite the insurers to associate in defending or negotiating. It

was part of the settlement with the regulators, each of which

conducted a single, comprehensive investigation into all of the

transactions at issue, as explained supra in Part II.A. The IC

review component grew out of the natural course of settlement

discussions about the same claim in which the insurers could have

34
participated all along. The addition of the IC may have been a

twist in settlement discussions, but it was not a new claim, nor

was it an unforeseeable component of the settlement discussions.

MBIA illustrates this reality by pointing out that ICs are not a

rare component of regulatory settlements with securities

regulators, so the insurers, which have extensive experience with

other policyholder claims, should not have been “blindsided” when

they found out that the settlements included such a component.

See Schwartz v. Liberty Mut. Ins. Co., 539 F.3d 135, 146 (2d Cir.

2008). And although the insurers argue that MBIA signed

settlement agreements containing an IC review in October 2005,

the fact remains that any offer of settlement made in October

2005 was preliminary; no settlement was consummated until the

regulators approved it, which both the state and federal

regulators did in January 2007, well after the insurers learned

of the IC component.10 Finally, even at the time they were first

notified of the IC in September 2006, the insurers made no

10
We acknowledge Federal’s argument that because the initial
settlement proposals were signed before the insurers were
informed of the IC, the insurers were presented with a fait
accompli when they were informed of the IC component as part of a
final settlement. Whatever the practical reality of this
argument (an issue on which we take no view), MBIA nevertheless
gave the insurers sufficient notice about the claims involved and
the order of magnitude of any potential settlement, yet the
insurers never attempted to join in settlement discussions.
Thus, under the association clause, MBIA fulfilled its duties.
That the information MBIA gave the insurers in October 2005 may
not have been perfect in hindsight has no legal import because
the insurers were given the opportunity to associate. In any
event, the insurers also had the opportunity to withhold consent
from any settlement but failed to do so, as we explain below.

35
overtures to become involved in the settlement process. They

cannot now argue that they were denied their rights under the

“right to associate” clause.

Because MBIA gave the insurers the opportunity to

exercise meaningfully their option to participate in settlement

discussions and adequately informed them of the nature and amount

of claims under consideration for settlement, it did not breach

its contractual obligation under the association clause.

Notwithstanding this conclusion, the insurers argue

that a settlement including an IC review exceeded the bounds of

the insurers’ agreement not to raise consent to settlement as a

defense to coverage. The insurers argue that they agreed to

waive this defense only for the $75 million settlement of the

AHERF investigation, which they were informed about in October

2005. MBIA disagrees, saying that the insurers gave it

unconditional authority to settle. It also argues that the

insurers were seasonably informed of the IC component of the

settlement offers so as to voice any objection before the

settlements were completed.

The insurers’ argument is rooted in the “right to

consent” clause in the policies, which states that MBIA will not

“agree not to settle any Claim, incur any Defense Costs or

otherwise assume any contractual obligation or admit any

liability with respect to any Claim without [the insurer’s]

36
written consent, which shall not be unreasonably withheld.”11

J.A. at 126.

“A consent clause entitles an insurer ‘to notice of a

proposed settlement and an opportunity to determine, before the

settlement, whether it will grant or withhold consent.’”

Schwartz, 539 F.3d at 145 (quoting Travelers Indem. Co. v.

Eitapence, 924 F.2d 48, 50 (2d Cir. 1991)). Whether notification

is sufficient depends on the circumstances. See id. at 146-47;

Eitapence, 924 F.2d at 50; State Farm Auto. Ins. Co. v. Blanco,

617 N.Y.S.2d 898, 899 (N.Y. App. Div. 1994). By an insurer’s

unreasonable delay, silence, or conduct, it can either waive a

consent requirement or acquiesce in a settlement. E.g., Blanco,

617 N.Y.S.2d at 899; see also Jones Lang Wootton USA v. LeBoeuf,

Lamb, Greene & MacRae, 674 N.Y.S.2d 280, 287-88 (N.Y. App. Div.

1998).

There is no doubt that MBIA informed the insurers about

the $75 million proposed settlement with the regulators for the

AHERF investigation; Federal and ACE each acknowledged that

figure in responding to MBIA’s request for permission to settle.

J.A. at 1042-44, 1096-1100. In their letters, the insurers

agreed not to raise their lack of written consent as a defense to

11
In its brief, MBIA seems to suggest that ACE’s policy does not
include Federal’s right to consent. ACE’s policy incorporates
the “terms, definitions, conditions, exclusions and limitations
of the [Federal policy], except as otherwise provided [in the ACE
policy].” J.A. at 187. The ACE policy is silent with respect to
the right to consent, so we do not consider the policies as
different in this regard.

37
coverage for those settlements — which the insurers carefully

described as disgorgement and penalties related to the AHERF

transaction. The waiver of a no-consent defense was not, as MBIA

urges, unconditional. Thus, the question becomes whether,

subsequent to the October 2005 settlement discussions, MBIA

sufficiently notified the insurers of the addition of the IC to

the settlement so as to allow them to withhold consent. We

conclude that MBIA provided sufficient notification.

To begin, MBIA informed the insurers that any

settlement proposal was subject to change. Although MBIA did not

inform the insurers about the IC until September 2006, it did so

then, in October 2006, and in a December 6, 2006, letter

containing copies of its final proposed offer of settlement. The

offer of settlement was sent to the regulators on December 15,

2006, and not accepted until the end of January 2007. These

various notifications to the insurers were enough to allow them

“determine, before the settlement, whether [they] will grant or

withhold consent.” Schwartz, 539 F.3d at 145. In Schwartz, we

held that a jury could find that eleven hours of notice

(overnight) was sufficient to satisfy a similar consent

provision. See id. at 145-47. To be sure, Schwartz involved a

situation where the insurer was deeply involved in settlement

discussions and monitoring, so the eleven-hour time period in

that case may have been enough because of the peculiar

circumstances present there. See id. Thus, while we do not in

38
any way suggest that notification must meet a temporal bright

line, we hold that in these particular circumstances, MBIA

notified the insurers about the IC with more than sufficient time

to digest the information under any conceivable standard. We

explain briefly.

Even if we assume that the December 6 letter was the

notification and the December 15 date was the time beyond which

the settlement was no longer subject to change or objection, the

insurers had over a week to decide whether to voice an objection

or lack of consent. They had been informed of the nature of the

claims to be settled and had solid indications of the dollar

amount of those claims. Moreover, the insurers participated in

at least two meetings with MBIA in September and October 2006 to

discuss settlement proposals, including the possibility of an IC

review. However, after no meeting or letter notice did the

insurers do anything or voice any objection. Nor have they

provided any explanation for their inaction. Given these facts,

we conclude that MBIA provided sufficient notice of the IC

component of the settlement. The insurers’ agreement to waive

lack of consent to settlement in 2005 was, by their silence and

inaction, reasonably perceived by MBIA to be a continuing waiver

of that defense as they learned more about the contours of the

final settlement being considered, without expressing any

objection to the additional provisions of the evolving

settlement. See, e.g., Blanco, 617 N.Y.S.2d at 899 (acquiescence

39
in settlement or waiver of prior consent provision indicated by

silence, insurer conduct, or unreasonable delay). Although it

may belabor the point, we note that the ultimate settlement arose

from a single claim, see supra Part II.A., and included elements

that grew out of a single course of settlement discussions, see

supra Part II.C. Given that the insurers were notified about the

IC and did not object, MBIA was entitled in this case to presume

that the insurers would not raise lack of written consent as a

defense to coverage with respect to the IC costs.

Before we conclude, there is one loose end. The

insurers argue that the Assurance of Discontinuance (“AOD”)

entered into with state regulators precludes coverage of IC-

related costs. The district court did not consider this

argument. “Ordinarily, we will not review an issue the district

court did not decide. However, whether we do so or not is a

matter within our discretion.” Colavito v. N.Y. Organ Donor

Network, Inc., 486 F.3d 78, 80 (2d Cir. 2007) (Sack, J.)

(internal quotation marks and citations omitted). Mindful that

“[w]e review a grant of summary judgment de novo applying the

same standard as the district court,” Graham v. Long Island

R.R., 230 F.3d 34, 38 (2d Cir. 2000), we exercise our discretion

in this case to consider this argument in the first instance in

order to minimize inefficiency and conserve judicial resources.

This question is a pure matter of contract interpretation, and no

facts are in dispute. Contracts are construed to give the

40
intention of the parties effect, so an unambiguous contract “must

be enforced according to the plain meaning of its terms.” Cont’l

Ins. Co., 603 F.3d at 180 (internal quotation marks omitted). If

we find, as we do here, that the contract is unambiguous, we “may

then award summary judgment.” Int’l Multifoods Corp., 309 F.3d

at 83 (internal quotation marks omitted).

The AOD says in the section outlining the $25 million

in disgorgement and civil penalties: “MBIA agrees that it shall

not . . . seek or accept, directly or indirectly, reimbursement

or indemnification, including, but not limited to, payment made

pursuant to any insurance policy, with regard to any or all of

the amounts payable pursuant to this Assurance.” J.A. at 338-39.

The AOD then, in a separate section, goes on for six pages to

discuss the requirements of the IC review, for which MBIA agreed

to pay, with no limitation on MBIA’s ability to seek or obtain

reimbursement. That section states that the IC’s “compensation

and expenses shall be borne exclusively by MBIA, and shall not be

deducted from any amount due under the provisions of this

Assurance.” Id. at 344.

The plain terms of the AOD fix the limitation on

reimbursement to “amounts” due under the AOD. An “amount” is the

“sum total to which anything mounts up or reaches” in “number” or

“quantity.” 1 Oxford English Dictionary 411 (2d ed. 1989).

“Amounts” relate here to the “amounts” laid out in the contract:

$10 million in disgorgement and $15 million in civil penalties,

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not to unspecified “compensation and expenses” incurred by an IC.

Moreover, IC-related expenses necessarily are not a set “amount”

due because the IC, at the time the agreement was signed, was set

to do work in the future. Finally, the AOD itself distinguishes

IC expenses from any “amount” due under the AOD when it says that

IC expenses may not be deduced from the “any amount due.” It

also contains two separate sections dealing with separate topics

— first, a monetary payment amount for disgorgement and civil

penalty and, second, an open-ended commitment to engage the IC to

determine whether MBIA engaged in misconduct — but the

reimbursement limitation appears only in the first section.

Given the terms of the AOD and its structure, we

conclude that the AOD does not preclude MBIA’s seeking

reimbursement for IC-related costs. Although it merely confirms

our conclusion, it is instructive that the IC ultimately

determined that MBIA did not engage in misconduct with respect to

the Capital Asset and US Airways transactions. If the IC had

concluded otherwise, liability would have been outstanding under

the AOD, and any agreement as to payment for such liability could

have included a restriction on MBIA’s ability to obtain

reimbursement.

Absent a prohibition on obtaining reimbursement for

these costs, MBIA may seek coverage for them. Indeed, MBIA is

entitled to coverage for costs related to the IC’s review because

the IC investigation was a covered investigation cost under the

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policies. The IC component was a thorough investigation of the

claims relating to the Capital Asset and US Airways transactions

and falls within the definition of “Investigation Costs” under

the policies.

III. CONCLUSION

For the reasons elucidated above, we agree with the

conclusions reached by the district court with respect to

coverage for all costs except those related to the independent

consultant. The judgment of the district court therefore is

affirmed in part and reversed in part. We remand the case to the

district court for entry of judgment in favor of MBIA on its

claim for coverage of the independent consultant’s costs. The

parties shall bear their own costs.

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