Florida Court Holds Criminal Conduct Exclusion In E&O Policy Applicable

In its recent decision in Certain Interested Underwriters at Lloyd’s v. AXA Equitable Life Insurance Company, 2013 U.S. Dist. LEXIS 159639 (S.D. Fla. Nov. 7, 2013), the United States District Court for the Southern District of Florida had occasion to consider the application of a criminal conduct exclusion in an insurance brokers professional liability policy.

Certain Interested Underwriters at Lloyd’s (“Lloyd’s”) insured Steven Brasner, an independent insurance broker, under an errors and omissions policy.  The underlying matter involved Mr. Brasner’s efforts to place life insurance coverage for his client, Geoffrey Glass.  Mr. Brasner proposed the purchase of two life insurance policies, one for $10 million and the other for $20 million, both of which would be purchased through insurance trusts established by Mr. Glass.  Mr. Brasner assisted with the processing of the policy applications, both of which were presented to AXA.  Among other things, both applications asked whether “Do you, the owner, intend to use or transfer the policy for any type of pre-death financial settlement, such as viatical settlement, senior settlement, life settlement, or for any other secondary market?”  Both applications answered this question in the negative.  AXA subsequently issued the two policies.  Only a few months later, however, the insurance trusts sold the policies to another entity – GIII – as investment vehicles.  It was later determined that Brasner, in fact, had falsified information on the applications, and had regularly done so, “to induce insurance companies to issue life insurance policies which would be held beyond the contestability period and then offered for sale on the secondary market.”

When Brasner’s schemes were discovered, AXA and other life insurance companies that had issued policies to Brasner’s clients, brought suits to rescind the policies.  The State of Florida also brought a criminal proceeding against Brasner.  Brasner ultimately pled guilty to several counts, including one that he had defrauded AXA by providing materially false information in the applications, including the applications submitted on behalf of Glass.  Several civil suits eventually followed, including one by GIII based on theories of negligent misrepresentation.  Brasner tendered the GIII matter to Lloyd’s, but Lloyd’s disclaimed coverage based on grounds.  Brasner and GIII later entered into a consent judgment for $1.45 million and an assignment of Brasner’s rights under the policy.

The first coverage defense asserted by Lloyd’s was that the conduct alleged did not fall within its policy’s definition of covered professional services, defined as “the marketing, sale or servicing of insurance products . . . .”  Lloyd’s argued that rather than selling insurance products, the GIII lawsuit related to Brasner’s sale of investment products.  The court found that while this argument might otherwise have merit, Lloyd’s failed to offer any evidence in support of this argument, thus precluding its right to summary judgment.

Lloyd’s also relied on a policy exclusion barring coverage for any claim:

… based upon, arising out of, directly or indirectly relating to or in any way involving . . . Falsification of any offer of an insurance contract or document, including but not limited to quotes, binders, indications or policies.

Lloyd’s argued that this exclusion should be read broadly enough to encompass falsification of any document, including insurance applications.  GIII, on the other hand, contended that documents identified in the exclusion, i.e., quotes, binders, indications, and policies, are all documents issued by insurers rather than by brokers, and that as such, the exclusion applied only to insurer communications.  The court found both interpretations of the exclusion to be reasonable, meaning that the term “document” as used in the exclusion was necessarily ambiguous and therefore must be construed in favor of coverage.

Finally, Lloyd’s relied on a policy exclusion barring coverage for claims:

… based upon, arising out of, directly or indirectly relating to or in any way involving . . . Conduct which is fraudulent, dishonest, criminal, willful, malicious, intentionally or knowingly wrongful, or otherwise intended to cause damage or injury to personal property; however, this exclusion shall not apply . . . unless there is a finding or adjudication in any proceeding of such conduct or an admission by an Insured of such conduct . . . .

Lloyd’s pointed to Brasner’s entry of a guilty plea, specifically with respect to the AXA policies, as to the basis for this exclusion’s application.  Looking to the plea deal, the court concluded that “[t]he totality of admissible evidence establishes conclusively that Brasner victimized AXA by making false and material misrepresentations on insurance applications.”  The court also found notable a portion of the plea agreement that allowed Brasner to continue receiving income from other prior placed policies, but prohibited him from receiving income the policies issued to Glass, thus further evidencing the fact that the Glass policies were part of Brasner’s scheme to defraud.  As such, and because these misrepresentations were central to Brasner’s efforts to resell the Glass policies to GIII, the court found the criminal conduct exclusion applicable to GIII’s lawsuit, and thus precluded coverage.