Chubb Corp.’s Vigilant Insurance must face a lawsuit by Bear Stearns Cos. accusing the insurer of breach of contract for refusing to pay part of a U.S. Securities and Exchange Commission settlement, New York state’s highest court ruled.

Bear Stearns in March 2006 agreed to pay $250 million to settle regulator’s claims that it was at the center of a system for clients to break mutual-fund trading rules. The accord comprised $160 million in wrongful profit and a $90 million civil penalty.

Bear Stearns, which was bought by JPMorgan Chase & Co. in 2008, demanded that Vigilant indemnify it for the $160 million in profit, $40 million in defense costs and a $14 settlement with mutual funds over lawsuits based on similar allegations. The insurer refused on the ground that the payment wasn’t an insurable loss or was excluded from coverage.

An appellate panel in Manhattan in December 2011 dismissed the suit, reversing a 2010 ruling by state Supreme Court Justice Charles Ramos. The Court of Appeals in Albany today reinstated the case, saying that while it doesn’t condone the activities described by the SEC, the insurers “have not met their heavy burden” of proving that Bear Stearns is barred from pursuing coverage under its policies.

Glenn A. Montgomery, a spokesman for Warren, New Jersey- based Chubb, didn’t immediately return a voice-mail message seeking comment on today’s ruling. Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, didn’t immediately respond to an e-mail seeking comment.

The case is J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 600979/2009, New York State Supreme Court (Manhattan).

Editors: Andrew Dunn, Glenn Holdcraft