Directors and officers liability insurers are in the business of selling protection against legal proceedings targeting companies and their executives. However, when policyholders actually have to fend off allegations of misconduct, D&O insurers often go on the attack against the very insureds that they are supposed to protect. In all too many cases, insurers assert policy interpretations that improperly diminish or eliminate coverage, try to cancel policies based on alleged misrepresentations in insurance applications, or use linguistic gymnastics to allocate as much of the policyholder’s losses as possible to uncovered conduct. Insured companies and executives need to fight back.
The Crime/Fraud Exclusion
D&O insurers often improperly invoke coverage exclusions that state exceptions to insurance coverage. The crime/fraud exclusion is a favorite. It typically bars coverage of losses from claims against insureds for deliberate criminal or fraudulent acts. Of course, disappointed investors and government regulators often accuse executives and companies of such acts. That is why companies buy D&O insurance in the first place. For example, investors may file a stock-drop lawsuit alleging intentionally misleading statements by executives in corporate disclosures. The crime/fraud exclusion typically bars coverage, however, only if an intentional criminal or fraudulent act is established by final, nonappealable adjudication. That means that the exclusion does not apply if the conduct giving rise to liability was not intentional but merely foolish, negligent or even reckless. It also means that the exclusion does not apply unless a court issues an adverse judgment based on intentional misconduct.
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