On August 26, 2019, the Eleventh Circuit Court of Appeals, applying Florida Law, held that ill-gotten gains do not constitute covered “loss” within the meaning of a D&O policy. In Philadelphia Indemnity Insurance Co. v. Sabal Insurance Group, Inc., No. 17-14844 (11th Cir. Aug. 29, 2019), the Miami-Dade County Office of the Inspector General investigated Sabal Insurance Group and its CEO/president Ian Norris for overcharging the Miami-Dade Aviation Department for workers’ compensation and general liability insurance premiums. Following the investigation, Norris was arrested and both Sabal and Norris were charged with grand theft. According to the charges, Sabal overcharged the aviation department by creating invoices with fraudulently inflated premiums. The total amount of alleged overcharging was $416,000, although the amount obtained during the relevant statute of limitations was $180,807.87. Sabal and Norris settled the charges and agreed to pay (1) $183,807.87 to the aviation department; (2) a $100,000 donation to the Denise Moon Memorial Fund; and (3) $20,000 in investigation costs to the aviation department.

Sabal provided notice of the investigation to Philadelphia Indemnity Insurance Co. under a D&O policy issued by Philadelphia Indemnity to Sabal, which provided insurance for “loss from claims” for a “D&O wrongful act.” An exclusion to the policy excluded coverage for loss “arising out of, based upon or attributable to such Insured gaining any profit, remuneration or advantage to which they were not legally entitled” but only if “a final and non-appealable judgment or adjudication establishes the Insured committed such act or omission.”

Philadelphia Indemnity funded the insureds’ defense under a reservation of rights. Thereafter, on February 19, 2016, Sabal sent Philadelphia Indemnity the proposed settlement agreement and asked that it provide any objections within one business day. Philadelphia Indemnity responded that it could not advise as to coverage within the given timeframe but agreed not to object to the settlement on the basis of the policy’s consent-to-settle provision. Then, on March 10, 2016, Philadelphia Indemnity denied coverage and refused to indemnify Sabal for any of the settlement payments, and later filed a declaratory judgment action in the U.S. District Court for the Southern District of Florida.

The district court granted summary judgment in Philadelphia Indemnity’s favor, finding that the settlement payments did not constitute covered “loss” because insurance policies do not insure restitution for ill-gotten gains, and the claims were clearly intended as restitution for the premium overcharging.

The Eleventh Circuit affirmed and held that covered “loss” within the meaning of the insuring clause did not include restitution for ill-gotten gains, which fell outside the definition of “loss” for “matters deemed uninsurable under the law to which th[e] Policy shall be construed.”

The court reasoned that insurance for ill-gotten gains violates Florida public policy because insurance for these types of claims could encourage the commission of wrongful acts by “compensat[ing] the wrongdoer.” The court rejected the insureds’ argument that a payment is only restitution for ill-gotten gains if it is determined to be so by a final and non-appealable judgment in accordance with the language of the exclusion. According to the court, the insureds’ position would require the court to incorrectly read the exclusion into the insuring clause, but an exclusion is irrelevant unless and until there is coverage in the first instance. The court also rejected the insureds’ argument that the insuring clause and the exclusion should be read in pari materia because otherwise the coverage provision would be superfluous. In that regard, the court reasoned that there could be circumstances when a claim is deemed uninsurable as a matter of law within the meaning of the insuring clause, but the insured has not committed a wrongful act so as to come within the purview of the exclusion.

Applying these principles to the settlement payments, the court held that the payment to the Miami-Dade Aviation Department and the reimbursement for investigative costs constituted restitution for ill-gotten gains and therefore did not constitute covered loss. The donation, however, did not constitute restitution, but was nonetheless not covered loss because it constituted a criminal fine or penalty.

As demonstrated by this opinion, policy interpretation is a process that starts (and sometimes) ends with the insuring clause.