National Union Fire Insurance Company of Pittsburgh, Pa., a subsidiary of American International Group, must immediately pay defense expenses for which it was found liable in a previous decision, according to a ruling by Justice Helen E. Freedman of the New York State Supreme Court in Manhattan.

National Union had contended that it should not have to pay the defense expenses to the plaintiff " the trustees of Princeton University " until the claims in question are allocated between covered and uncovered.

The August 10, 2007 ruling stems from a claim involving the Robertson Foundation, which, according to its mission statement, is dedicated to improving the facilities for the training and education of men and women for government service. A seven-member board of trustees governs the foundation consisting of three family-appointed trustees and four Princeton University-appointed trustees.

In July 2002, the family-appointed trustees and others filed an action in New Jersey against Princeton, the university-appointed trustees, and the Robertson Foundation, alleging that Princeton and the university-appointed trustees abused their majority interest, breached fiduciary duties, and misappropriated more than $100 million by using the foundations assets to support Princetons general interests rather than to advance the foundations mission.

Princeton then filed a suit against National Union, seeking coverage in the amount of $15 million " the limit of a D&O policy issued to Princeton by the insurer " to cover defense expenses.

National Union contended that the underlying action against the university-appointed trustees falls under an insured versus insured exclusion in the policy because both the plaintiffs and defendants in that suit involve insureds under the definition of the policy.

The insurer further stated that, with respect to remaining claims that do not fall under the exclusion, the obligations of National Union should be capped at $5 million because an endorsement in the policy sets that limit for defense against claims seeking equitable or injunctive relief, as opposed to those seeking monetary damages.

In a decision handed down on April 10, 2007, Justice Freedman acknowledged that some of the claims in the underlying case fall under the insured versus insured exclusion. However she explained that this only accounts for two out of the 12 claims against Princeton.

As to capping the limit at $5 million, Justice Freedman ruled that the policy endorsement cited by National Union specifically distinguishes claims seeking equitable relief from claims seeking monetary damages. Thus, the equitable relief sub-limit does not apply to the claims seeking money damages or return of funds.

Justice Freedman concluded, Neither the insured versus insured exclusion nor the equitable relief sub-limit apply to the claims seeking to recover more than $100 million from Princeton.

Princeton subsequently filed another motion after National Union neglected to pay all of the expenses as ordered in the decision. The disagreement involved the manner in which National Union should pay the defense costs, since the underlying case involves both covered and non-covered claims.

Princeton argued that National Union should immediately comply with the April 10 decision, while National Union contended that payment should be withheld until it is determined which claims in the New Jersey action are covered under the insurance policy.

Justice Freedman ruled in favor of Princeton, stating, An insurer who covers an insureds defense expenses is entitled to distinguish between covered and non-covered claims. However, an insurer must pay all the defense costs as the insured incurs them, unless they can be allocated as incurred. Although the policy does not cover some of the claims asserted against Princeton in the underlying action, both the covered and uncovered claims were defended in a single action, and defendants have not made any showing that an apportionment is feasible.

Justice Freedman also pointed to language in her April 10 ruling, which notes that apportionment is unlikely to affect [National Unions] ultimate financial obligation because Princetons expenditures had already far exceeded the $15 million limit, and the insured versus insured exclusion only applies to two of the claims in the New Jersey action.

It was also noted that National Union may be liable for interest on the defense expenses that were due when Princeton incurred them, however Justice Freedman said that interest cannot be calculated at this juncture and a determination is deferred on that amount.

In a statement, William G. Passannante, counsel to the Princeton trustees and co-chair of the Insurance Recovery Group at Anderson Kill & Olick, P.C., said, Judge Freemans decision cut through the insurance companys fog of overextended exclusions to affirm the broad duty to defend that is at the core of the liability insurance promise.