Does your D&O insurance policy cover criminal charges?

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Directors and Officers (“D&O”) insurance policies cover individuals and entities for a wide variety of “wrongdoing” claims. Many D&O policies provide coverage for claims based on criminal proceedings. When criminal charges are settled against corporations and officers, the settlement very often includes fines, penalties, investigative fees and other payments. Are these payments covered by the D&O policy? The Eleventh Circuit Court of Appeals recently addressed this issue under Florida law.

In Philadelphia Indemnity Insurance Co. v. Sabal Insurance Group, Inc., No. 17-14844 (11th Cir. 26 Aug 2019) (Not for publication), a company and its CEO were changed with a grand theft resulting from the alleged overcharging of insurance premiums from policies sold to a county agency . The charges were settled with the state of Florida under a stipulated settlement agreement. The settlement required the company and CEO to pay the county a certain amount to reimburse it for inflated insurance premiums, a donation to a foundation (for which no charitable deduction was allowed) and the costs of the investigation. The policyholder has requested compensation for these payments from the insurer D&O. The carrier denied coverage and filed a declaratory judgment action. On the counterclaims for summary judgment, the district court allowed the carrier’s petition and dismissed the insured’s counterclaim. On appeal, the circuit court confirmed.

The policy expected that it would pay for losses resulting from D&O wrongdoing claims. A claim under the policy included “criminal proceedings initiated by the return of an indictment”. As the court noted, it was undisputed that the criminal charges in this case constituted a claim under the policy. Policy losses included damages and defense costs, but did not include “matters deemed uninsurable under the law” or “criminal or civil fines or penalties imposed by law”. The policy also included exclusions for losses resulting from the insured’s profit to which he was not legally entitled and for losses based on dishonest or fraudulent acts or omissions on the part of the insured. Each of these exclusions (paraphrased above, but set out in full in the notice) only applied if there was a final and binding judgment or decision establishing that the insured committed the acts.

In asserting, the appeals court determined that under Florida law, an insurance contract excludes restitution of ill-gotten gains. Since the payments were made to resolve an alleged intentional fault, the court concluded that the policyholder should not be able to insure against his own willful fault. The court also ruled that public order favors exclusion from coverage. Thus, ruled the court, “insurance contracts are not, under Florida law, authorized to ensure the restitution of ill-gotten gains”.

The court agreed with the district court that the exclusions did not affect the coverage provisions (remember that the exclusions required a final and non-appealable judgment or decision) because under Florida law, an exclusionary provision does not apply unless there is coverage in the first example. As the court said, “[w]Without coverage, there is nothing to exclude. Since the policy did not provide coverage for restitution of ill-gotten gains, there was no need to look into the exclusion clause, the court ruled.

The court found that the payments to the county to reimburse him for inflated insurance premiums were a restitution payment because it had been made to resolve a criminal charge and was equal to the amount of ill-gotten gains alleged within the statute of limitations. The “gift”, however, was not restitution, but, according to the court, was not a covered loss because it had been imposed as a penalty. The costs of the investigation were, however, considered as compensation by the court. Thus, no coverage existed for these payments under the policy.

The court also upheld the dismissal of the policyholder’s motion for summary judgment on his breach of contract counterclaim. In rejecting the policyholder’s arguments that the payments were covered by the policy, the appeals court agreed with the district court that the breach of contract claim had failed because there was no coverage. nor breach of contract.

© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume IX, number 241


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