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Errors and omissions (E&O) insurance policies typically exclude coverage for liability arising out of intentional, malicious, fraudulent or criminal acts. Some carriers, however, do provide for an exception to this exclusion until the basis of liability is established by court ruling. A small subset of such insurers include coverage for costs and fees attributable to the defense of such allegations. In other words, these few carriers, relinquish the right to seek recovery of defense costs which they may expend in defending allegations of non-covered intentional acts, which are ultimately proved up in a court of law. The Lloyd's Daily Money Manager Professional Liability program is a member of this elite group.
When examining a policy form, the specific wording of both the intentional acts endorsement and any exceptions to it can be critical because the insurer's defense obligation may well turn on a single word or phrase. For example, a recent ruling out of the Fifth Circuit examined the difference between the phrase "final adjudication", "in fact", and "admission or plea" within the context of intentional acts exclusions. That case involved D&O policies applicable to executives of Stanford Financial Group, who faced criminal and civil charges for allegedly defrauding investors in a $7 billion Ponzi scheme centered around certificates of deposit issued by Stanford's Antiguan bank. See Pendergest-Holt v. Lloyd's of London, et al., No. 10-20069 (5th Cir. Mar. 15, 2010).
The policies had a fraud exclusion, which excluded any "Claim .... brought about or contributed to in fact by ... any dishonest, fraudulent or criminal act or omission by the Directors or Officers or the Company ... as determined by a final adjudication." The policies also had a separate money laundering exclusion, which was worded differently. That exclusion barred coverage for loss (including defense costs) resulting from any claim "arising directly or indirectly as a result of or in connection with any act or acts (or alleged act or acts) of Money Laundering," but then stated that "Underwriters shall pay Costs, Charges and Expenses in the event of an alleged act or alleged acts until such time that it is determined that the alleged act or alleged acts did in fact occur" (emphasis added).
When one of the defendants struck a plea deal, and the insurers took the position that money laundering had "in fact" occurred and that coverage for defense costs would be discontinued. While the court in that case sided with the insureds, this episode highlights the fact that policies which do not carry an unequivocal intentional acts defense obligation, like the Lloyd's policy does, may well leave an insured exposed to mounting defense costs precisely when coverage is needed most. In addition, the insured had to deal with a coverage dispute while the underlying case was ongoing. A clear grant of coverage is always in everyone's best interest.
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