Stanford Judge Refuses to Stay Discovery of Insurer's Requests for Admissions

Pendergast-Holt v. Certain Underwriters at Lloyd's of London, No. H-09-3712 (S. D. Tex. Aug. 11, 2010) see Order.
This seemingly minor order denying the insureds' motion for a protective order barring certain discovery probably marks the begining of the end for Robert Allen Stanford's (and other directors of the doomed Stanford financial entities) quest for D&O insurance coverage for their criminal defense expenses.  You remember Stanford and his fellow directors, who sued Lloyd's in 2009 to restart the flow of insurance proceeds to fund one of the costliest criminal defense trials of the modern age.  (Lloyd's had initially agreed to fund defense costs but stopped after one of the directors, Leornard Davis, copped a plea and told the bizarre tale of Stanford's ponzi operations.  In Lloyd's judgment, Davis's plea triggered an exclusion in the policy by establishing "in fact" deliberate wrongdoing).  The judge presiding over the criminal trial also ruled in the coverage lawsuit that Lloyd's had to continue funding the criminal defense.  On appeal, the 5th Circuit remanded the case back to the lower court for a new determination by a different judge but ordered Lloyd's to continue paying defense costs until the new judge ruled.  I described the peculiar circumstances of the 5th Circuit ruling here.
The new judge understood her instructions from the 5th Circuit as follows: (1) whether excluded conduct "in fact" occurred was something that Lloyd's could not arbitrarily decide on its own; a court must decide; (2) the court overseeing the criminal trial could not also determine the insurance issues; and (3) Lloyd's must continue to advance defense expenses until the court decides whether, and at what point, excluded conduct was judicially established "in fact" (i.e., when Davis pled out, when Stanford et al. admit to wrongdoing, or some other trigger the court decides).  The new judge noted that as of July 30, 2010, Lloyd's had advanced more than $15 million for defense costs (out of potential total limits of $90 million).
Which brings us to this discovery order.  Because the coverage action is a civil lawsuit, Lloyd's gets to ask the other side questions in interrogatories and, more important, gets to ask the directors to admit or deny certain things, like all of Davis' admissions in his plea.  Like many criminal defendants, Stanford et al. are, or will be, standing on their 5th amendment right to remain silent rather than self-incriminate, a right they say answering Lloyd's discovery will violate.  Hence the motion for protective order that they not be required to answer the discovery.
The court denied the motion.  Following the lead of the 5th Circuit, the court noted that the insureds bargained for a D&O policy with an "in fact" trigger for the relevant exclusion.  Also available are so-called "actual adjudication" policies, under which the conduct exclusions do not apply until a fact finder establishes the excluded conduct in the trial itself.  Lloyd's, therefore, is entitled to an "in fact" determination of the conduct "in which all admissible evidence is welcome," said the 5th Circuit.  Also, Lloyd's continues to bleed.

[The insureds] will not be permitted to seek through this suit ... continued payment of defense costs under the Policy, while simultaneouly denying [Lloyd's] discovery that [Lloyd's] seeks in an effort to defend themselves against Plaintiffs' claims and thus liability for those costs.

What about the directors' 5th amendment rights?  The judge acknowleged that other courts have on occasion stayed discovery in a civil action rather than force criminal defendants to choose between their right to remain silent and some advantage in a civil suit.  The difference here is that the insureds filed the coverage lawsuit; the insureds were defendants in the other cases.  Also, Lloyd's is under a continuing injuction to fund the criminal defense to the tune of millions of dollars. 

The plaintiff who retreats under the cloak of the Fifth Amendment cannot hope to gain an unequal advantage against the party he has chosen to sue.  To hold otherwise would, in terms of the customary metaphor, enable plaintiff to use his Fifth Amendment shield as a sword.

With this loss, the Stanford defendants must either find a way to respond to Lloyd's discovery requests that does not establish "in fact" the excluded wrongdoing or go down to swift defeat by summary judgment.  Maybe the directors might hope to raise fact questions in their responses that avoid summary judgment and keep the tap flowing until a jury decides the coverage issues.  But even so, the civil trial is likely to occur on an expedited basis before the criminal trial.