A recent decision from the U.S. District Court for the Southern District of Texas demonstrates the serious consequences of failing to negotiate for narrow policy exclusions in directors and officers liability (“D&O”) insurance coverage. In Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, No. H-09-3712, 2010 U.S. Dist. LEXIS 108920 (S.D. Tex. Oct. 13, 2010) (“Pendergest-Holt III”), the court ended D&O insurance coverage for R. Allen Stanford and other Stanford Financial executives based on an “in fact” determination that a money-laundering policy exclusion applied prior to a final adjudication of such executives’ criminal and civil liability. The court’s decision is notable because many D&O insurance policies contain similar “in fact” exclusionary language, and insurers often take the position that they can unilaterally make such an “in fact” determination at any time to preclude coverage. Although here the court rather than the insurer made the “in fact” determination, the court made that determination while criminal and civil actions against the policyholders were ongoing; thus, the court cut off defense costs coverage before the policyholders had been found guilty or liable for any misconduct.

With targeted guidance by insurance coverage counsel during placement of D&O insurance policies, this is a result that could have been avoided through negotiating for a money-laundering exclusion that, rather than applying “in fact,” applied only after a “final adjudication in an underlying action.”

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