Alert

Court of Appeals Affirms That “In Fact” Requirement Was Triggered by Jury’s Guilty Verdict

April 18, 2013

Applying Illinois and Florida law, the United States Court of Appeals for the Fourth Circuit has affirmed that a jury’s guilty verdict in a criminal proceeding triggers the “in fact” element of a D&O policy’s dishonesty and personal profit exclusions, allowing the insurer unilaterally to cease advancing defense costs.  Farkas v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2013 WL 1459248 (4th Cir. Apr. 11, 2013).  In a short per curiam opinion without additional legal analysis, the court adopted the district court’s “thorough” opinion in Farkas v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 861 F. Supp. 2d 716 (E.D. Va. 2012), originally discussed in the May 2012 issue of Executive Summary and summarized briefly below.

The insured, the chairman of a bankrupt mortgage corporation, was indicted on various criminal counts for bank, wire and securities fraud.  The mortgage corporation’s D&O insurer agreed that the criminal proceeding constituted a claim under the policy, but reserved its right to limit or deny coverage based on policy exclusions for claims “in fact” arising out of fraud or wrongful personal profit.  Pursuant to an order of the bankruptcy court, the insurer advanced approximately $1 million for the chairman’s defense costs and then awaited court approval to advance additional amounts.  The jury found the chairman guilty on all counts, and the insurer informed the chairman that the verdict triggered the “in fact” element of the policy’s dishonesty and personal profits exclusions, such that it would no longer advance defense costs. 

In the ensuing coverage dispute, the court first held that the jury’s verdict clearly triggered the “in fact” requirement of the personal profit and dishonesty exclusions, rejecting the chairman’s argument that the phrase was ambiguous and holding that the insurer properly could refuse to advance further defense costs. 

The court further held that the insurer could recoup the defense costs previously advanced, rejecting the insured’s argument that the carrier was obligated to advance all defense costs incurred prior to the jury’s verdict and then seek reimbursement on the basis that the dishonesty and personal profit exclusions barred coverage.  Noting that this was not a case where the carrier had “dragged its feet before advancing costs,” the court held that forcing the carrier to pay out amounts for which it could immediately seek recoupment was not appropriate either under the terms of the policy or as a practical matter. 

The opinion is available here.

Read Time: 2 min
Jump to top of page

Wiley Rein LLP Cookie Preference Center

Your Privacy

When you visit our website, we use cookies on your browser to collect information. The information collected might relate to you, your preferences, or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. For more information about how we use Cookies, please see our Privacy Policy.

Strictly Necessary Cookies

Always Active

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Functional Cookies

Always Active

Some functions of the site require remembering user choices, for example your cookie preference, or keyword search highlighting. These do not store any personal information.

Form Submissions

Always Active

When submitting your data, for example on a contact form or event registration, a cookie might be used to monitor the state of your submission across pages.

Performance Cookies

Performance cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.

Powered by Firmseek