Friday, March 23, 2012

Virginia Federal Court Grants Summary Judgment In Favor of D&O Insurer

In its recent decision in Farkas v. Nat'l Union Fire Ins. Co., 2012 U.S. Dist. LEXIS 38696 (E.D. Va. Mar 21, 2012), the United States District Court for the Eastern District of Virginia had occasion to consider the application of exclusions in a directors and officers policy barring coverage for wrongful gains and fraudulent conduct if proven “in fact.”

An individual insured – the chairman and majority shareholder of the insured entity – was indicted for multiple counts of committing and conspiring to commit bank, wire, and securities fraud.  He sought coverage under the D&O policy issued by National Union.  National Union agreed to advance defense costs in the criminal proceeding, subject to a reservation of rights on the following policy exclusions:

The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against an insured: [4(a)] arising out of, based upon or attributable to the gaining in fact of any profit or advantage to which an Insured was not legally entitled; [and] . . . [4(c)] arising out of, based upon or attributable to the committing in fact of any criminal, fraudulent or dishonest act, or any willful violation of any statute, rule or law.

A criminal trial resulted in the insured being convicted of sixteen counts of fraud and conspiracy to commit fraud.  National Union subsequently disclaimed coverage on the two policy exclusions, contending that the conviction proved “in fact” that the insured had gained a profit to which he was not legally entitled and that he had committed fraudulent or dishonest acts.  In the subsequent coverage action, National Union sought a declaration that not only did the exclusions apply, but that it was entitled to recoup defense costs already advanced.

The insured argued that the exclusions were ambiguous as to when they apply, and were  thus unenforceable.  The court rejected this argument, noting that the majority of courts to have considered similar “in fact” exclusions have ruled that “some pertinent factual finding” is all that is necessary to trigger these types of exclusions, and that the underlying criminal conviction, resulting from a jury trial, satisfied this requirement.  Moreover, the court rejected the insured’s argument that the potential for a reversal on appeal precluded a finding in National Union’s favor, noting that there was no case law to support such an interpretation of the “in fact” language.  The court also noted that “in fact” language, as opposed to similar exclusions only requiring a “final adjudication,” gives the insurer insurer the option to obtain a finding “in fact” in a declaratory judgment action or to rely on the outcome of the underlying action.

The court further found that in light of the finding that the policy exclusions applied, National Union was entitled to recoup defense costs already paid, since the policy contained a provision stating that “advanced payments by the Insurer shall be repaid to the Insurer by the Insureds or the Company, severally according to their respective interests, in the event and to the extent that the Insureds or the Company shall not be entitled under the terms and conditions of this policy to payment of such Loss.”

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