A federal court in Florida recently held that civil theft committed by the insured did not constitute a covered "loss," and was excluded, under a directors and officers policy. The case provides an interesting study on common D&O policy definitions and exclusions.
In Twin City Fire Ins. Co. v. CR Technologies, Inc., 13-cv-80998-RLR (S.D. Fla. Mar. 11, 2015), the insured, U.S. Datanet Corporation, and its subsidiary had rented telecommunications equipment from CR Technologies. When the agreement ended, Datanet decided not to renew, and kept the equipment.
CR Technologies sued in state court, alleging breach of contract, conversion, civil theft, tortious interference with an advantageous business relationship, violations of the Florida Deceptive and Unfair Trade Practices Act, and negligent misrepresentation. Twin City Fire defended the suit under a reservation of rights. The jury returned a verdict in favor of CR Technologies on all counts except tortious interference. The judgment totaled $644,746, including treble damages because the jury found that Datanet had committed civil theft.
In the declaratory judgment action in federal court brought by Datanet's insurer, Twin City Fire maintained that the judgment was not a covered "loss" under the policy, and that two exclusions applied. The court agreed.
The policy defined "loss" as:
"not includ[ing] taxes, fines or penalties imposed by law, the multiple portion of any multiplied damage award, or matters that may be deemed uninsurable under the law pursuant to which this Policy shall be construed."
Citing CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co., 291 F. App’x 220 (11th Cir. 2008), the court held that "loss" did not include "the restoration of ill-gotten gains." The court also held that civil theft was not insurable as a matter of public policy, and that the treble damages portion of the award was excluded from the definition of "loss."
The court also agreed with Twin City Fire that several exclusions in the policy barred coverage for the judgment. The first exclusion the court considered was for fraudulent or criminal acts. It stated that the insurance did not apply to loss for any claim:
"based upon, arising from, or in any way related to any deliberately fraudulent or criminal act or omission or any willful violation of any law by the Insureds if a judgment or other final adjudication establishes such an act, omission or violation."
CR Technologies argued that the judgment could be allocated between civil theft and the other, non-fraudulent and non-criminal acts. But the court found that the judgment was "squarely within the express language of this exclusion."
Next, the court considered an exclusion for personal profit, which stated that the insurance did not apply to loss for any claim:
"based upon, arising from, or in any way related to the gaining, in fact, of an personal profit, remuneration, or advantage to which the Insureds are not legally entitled if a judgment or other final adjudication establishes that such a gain did occur."
The court again found that the judgment was "squarely within the express language of this exclusion."
Turning to the final policy provision, the court held that contractual-liability exclusion also applied because Datanet's acts had occurred at the end of the rental agreement with CR Technologies.
(The court rejected other arguments for coverage, including that the crime coverage provided by Twin City Fire applied. And although CR Technologies had filed a third-party complaint against Datanet's property insurer, the court found that the judgment was not covered under that policy. The court also declined to find coverage by estoppel.)
The decision in this case was focused on the judgment against the insured for civil theft, which resulted in trebled damages. The policy included a fairly typical definition of "loss" and common exclusions for fraudulent or criminal acts and personal profit. And the two exclusions had requirements that the excluded acts be determined by a judgment or final adjudication. Those requirements could have resulted in settlement before trial if the insured, claimant, and insurer were motivated to avoid the uncertainty of trial and a possible coverage dispute. But once the verdict and judgment were entered against the insured, coverage appears to have been a foregone conclusion.