Directors and officers liability insurance policies often contain exclusions for losses related to criminal or deliberately fraudulent activities. Such exclusions usually are limited to circumstances in which the fraud or crime is finally adjudicated. The path from initial allegations to ‘finally adjudicated’ can be a long one.
The current example of Bill Cosby’s conviction and sentence having been vacated after three years of imprisonment shows the possible delays, and provides a theoretical backdrop to describe the interactions of the liability insurance exclusions and criminal convictions.
Cosby did in fact hold liability coverage under homeowners and excess liability policies. The insurance company, AIG, was ordered by the federal First Circuit Court of Appeals to cover defense costs under those policies for suits against Mr. Cosby alleging defamation. But those policies excluded coverage for claims “arising out of any actual, alleged or threatened” sexual misconduct or abuse – and that exclusion does not require final adjudication. AIG Property Casualty Co. v. Cosby et al., 17-1505 (2018). D&O policies, however, do commonly require final adjudication before any exclusion for criminal or deliberately fraudulent conduct can be invoked to deny coverage.
The purpose of liability insurance is not only to insure the policyholder, but also to make insurance resources available to compensate tort victims. Any reinforcement of the final adjudication requirement for wrongful acts exclusions in D&O policies might help do just that.
The Cosby Conviction Vacated
On June 30, the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. William Henry Cosby Jr., vacated the convictions and judgment of sentence against Cosby. He was discharged by the court based upon due process failures in the prosecution.
The court found that Cosby relied upon the district attorney’s announcement in 2005 that Cosby would not be prosecuted. That announcement was made essentially to require that Cosby testify in a civil case without the shield of Fifth Amendment protections. The court states that Cosby’s reliance was reasonable, and it resulted in depriving Cosby of a fundamental constitutional right when he was compelled to furnish self-incriminating testimony in a later civil case.
The Pennsylvania Supreme Court states, “When he announced his declination decision on behalf of the Commonwealth, district attorney Castor knew that Cosby would be forced to testify based upon the Commonwealth’s assurances.”
The court went on to state: “Knowing that he induced Cosby’s reliance, and that his decision not to prosecute was designed to do just that, D.A. Castor made no attempt in 2005 or in any of the 10 years that followed to remedy any misperception or stop Cosby from openly and detrimentally relying upon that decision. In light of the circumstances, the subsequent decision by success successor D.A.s to prosecute Cosby violated Cosby’s due process rights. No other conclusion comports with the principles of due process and fundamental fairness to which all aspects of our criminal justice system must adhere.”
The court found that the change in prosecutors did not change the analysis. “No mere changing of the guard strips that circumstance of its inequity.”
If there were a D&O claim related to the facts of the Cosby case in Pennsylvania, the Pennsylvania Supreme Court would just have prevented the proper application of the criminal acts exclusions. D&O insurance companies have argued in other cases that an exclusion should not be negated when a conviction was vacated on a ‘technicality’ — though in this case the due process concerns of the court rise to a constitutional level. That the conviction is overturned, however, is enough to prevent the application of a criminal acts exclusion requiring a final adjudication.
D&O Insurance Companies Must Prove Exclusions
The assertion of an exclusion in a D&O policy requires a D&O liability insurance company to meet a heavy burden. That a liability insurance company would have one less reason to deny a claim potentially brings additional insurance resources to bear to compensate victims. That a criminal conviction is vacated should clearly eliminate the application of a criminal acts exclusion requiring a final adjudication. The argument that a due process violation, such as the one cited by the Pennsylvania Supreme Court, is a mere ‘technicality’ is of little moment. A vacated conviction is not a conviction that supports the use of a criminal acts exclusion.
About William G. Passannante
Passannante is co-chair of Anderson Kill’s Insurance Recovery Group and represents policyholders on insurance recovery in D&O, E&O, property, asbestos, environmental, property, food-borne illness, and other insurance disputes. He is not involved in the Cosby case.