In the current environment of heightened regulatory scrutiny and vigorous criminal and civil enforcement of insider trading and other securities laws, hedge fund managers are increasingly invoking D&O liability policies to cover defense costs. See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities
,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011). Insurers, meanwhile, are closely analyzing whether insureds have breached terms or falsified applications. A recent case points to the types of disputes that arise between insurers and hedge fund manager insureds. In the case, insurance carrier XL Specialty Insurance Company (XL) sued Level Global Investors, L.P. (Level Global), seeking, among other things, a declaration that it was not obligated to pay defense costs to Level Global and its officers and directors, who are facing criminal and civil actions
, because of alleged misrepresentations made by the insureds in their insurance application. See “Insurer Initiates Action to Recover Defense Costs Advanced to Hedge Fund Manager Level Global, Claiming Level Global Made False Statements in its D&O/E&O Liability Insurance Application
,” Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012). On June 13, 2012, the United States District Court for the Southern District of New York (Court) ordered XL to advance defense costs to Level Global and its officers and directors pending the adjudication of XL’s request for a declaratory judgment of no coverage under the D&O insurance policy. The Court’s holding in this case is a significant victory for hedge fund managers in that it appears to reaffirm the legal maxim that ambiguous insurance contracts are construed against the insurer, in this instance by mandating that insurers must advance payments for defense expenses while a court adjudicates a claim of exclusion from coverage. This article summarizes the factual background of the case and the legal analysis the Court undertook in reaching its decision.