Directors and Officers (“D&O”) insurance policies cover individuals and entities for a wide variety of claims for “wrongful acts.”  Many D&O policies provide coverage for claims based on criminal proceedings.  When criminal charges are settled against corporations and officers, very often the settlement includes fines, penalties, cost of investigation and other payments.  Are these payments covered under 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In Philadelphia Indemnity Insurance Co. v. Sabal Insurance Group, Inc., No. 17-14844 (11th Cir. Aug. 26, 2019) (Not for Publication), a corporation and its CEO were changed with grand theft stemming from the alleged overcharging of insurance premiums to policies sold to a County agency.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 sum to reimburse it for the inflated insurance premiums, a donation to a foundation (for which no charitable deduction was allowed), and the costs of the investigation.  The policyholder sought indemnification for these payments from the D&O carrier.  The carrier denied coverage and filed a declaratory judgment action.  On cross-motions for summary judgment, the district court granted the carrier’s motion and denied the policyholder’s cross-motion.  On appeal, the circuit court affirmed.

The policy provided that it would pay loss from claims for D&O wrongful acts.  A claim under the policy included “a criminal proceeding commenced by a return of an indictment.”  As the court noted, there was no dispute that the criminal charges in this case qualified as a claim under the policy.  Loss under the policy 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 had exclusions for loss arising out of the insured gaining any profit to which they were not legally entitled and to loss based on dishonest or fraudulent acts or omissions by the insured.  Each of these exclusions (paraphrased above, but set out in full in the opinion) only applied if there were a final and nonappealable judgment or adjudication establishing that the insured committed the acts.

In affirming, the appeals court determined that under Florida law, an insurance contract excludes the restitution of ill-gotten gains.  Because the payments were made to resolve alleged intentional misconduct, the court found that the policyholder should not be able to insure against its own intentional misconduct.  The court also held that public policy favored excluding coverage. Thus, held the court, “insurance contracts are not, as a matter of Florida law, permitted to insure the restitution of ill-gotten gains.”

The court agreed with the district court that the exclusions did not affect the coverage provisions (recall that the exclusions required a final and non-appealable judgment or adjudication) because under Florida law, an exclusionary provision does not apply unless there is coverage in the first instance.  As the court stated, “[w]ithout coverage there is nothing from which to exclude.”  Because the policy did not provide coverage for restitution of ill-gotten gains, there was no need to look to the exclusionary provision, held the court.

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

The court also affirmed the denial of the policyholder’s summary judgment motion on its breach of contract counterclaim.  In rejecting the policyholder’s arguments that the payments were covered under the policy, the appellate court agreed with the district court that the breach of contract claim failed because there was no coverage and no breach of contract.