JPMorgan Chase & Co. has agreed to pay a $400 million settlement to the carrier of its liability insurance following the crash of the mortgage-backed securities market. Insurer Syncora claimed that JPMorgan misrepresented the risk in purchasing the securities, causing Syncora to have to pay out hundreds of millions in claims to purchasers of the securities from JP Morgan.
The trouble began in 2008, when Bear Stearns created and sold hundreds of millions of mortgage-backed securities. Then, as the loans they were based on began to default, Bear Stearns faced a collapse due to claims of securities fraud. JP Morgan absorbed Bear Stearns in the taxpayer bailout of the finance industry in 2008, and Syncora began having to pay out insurance claims relating to the losses in the amounts of $320 million, $94 million and $50 million.
Over the next four years, Syncora filed four lawsuits against JP Morgan and former Bear Stearns subsidiary EMC. JPMorgan argued that Syncora knew the investments were risky or failed to do sufficient due diligence to determine the level of the risk. Syncora countered, however, that EMCs own records indicated that EMC impeded Syncora’s ability to conduct due diligence.
Syncora has announced that the settlement will allow the company to survive at least in the short run.
Generally, liability insurance policies do not cover intentional wrongdoing such as securities fraud, so it was unusual for Syncora to be on the hook for the payments to the claimants. If the claims were based on negligence by JP Morgan and Bear Stearns, which many savvy plaintiffs lawyers do to make sure the claims are covered by insurance, Syncora would be obligated to pay the claims, which Syncora did. Syncora then was able to show that it would not have insured the securities but for Morgan’s and Stearns’ fraudulent misrepresentations as to the risk of insuring the securities.
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