An insured’s guilty plea to criminal charges relieved his professional liability insurer of its duty under the policy to defend him against related civil claims, according to a June 18, 2013 Order by Southern District of Florida Judge Daniel Hurley. Judge Hurley’s decision is interesting because it addresses the question whether the court can consider extraneous matter (i.e., the guilty plea) in determining the insurer’s defense duty, and because it considers the degree of relationship between the criminal conviction and the separate civil claims required for the policy exclusion to be triggered.   A copy of Judge Hurley’s order can be found here.



At the times relevant to this dispute, Steven Brasner was a life insurance agent who procured life insurance policies intending to sell the policies to third party investors. The life insurance company sought to avoid ths type of insurance actiivity to avoid issuing policies insuring the lives of persons who were strangers to the benficiaries. The life insurance company later alleged that Brasner had obtained the policies through misrepresentations in the certificates he provided to the life insurer. Among other things, he allegedly cerified that he did not intend to sell the policies in the secondary market. When the life insurer discovered the misrepresentations, it voided the policies.


In a criminal proceeding, Brasner pled guilty to grand theft and to participation in an organized scheme to defraud. Two civil actions were also filed against Brasner: the life insurer sued to recover over $1 million in commissions it had paid to Brasner; and an investor that had purchased policies that were voided sued to recover the amounts it lost..


Brasner submitted the two civil lawsuits as claims to his Professional Errors and Omissions Insurer. The E&O insurer denied that it had any duty to defend or indemnify Brasner for the claims, in reliance on the policy’s criminal misconduct exclusion, which states, inter alia, that “we will not defend any Claim … directly or indirectly relating to or in any way involving … conduct which is fraudulent, dishonest or criminal.” The E&O policy further states that the exclusion does not apply “unless there is a finding or adjudication in any proceeding of such conduct.”


The E&O insurer filed an action seeking a judicial declaration that it had no duty to defend or indemnify Brasner. The E&O insurer moved for partial summary judgment that it has no duty to defend Brasner in the two lawsuits. Brasner and the investor who had sued him (GIII) opposed the motion.


The June 18 Ruling

In his June 18 Opinion, Judge Hurley granted the E&O insurer’s motion for partial summary judgment, holding that Branser’s criminal conviction triggered the policy’s criminal misconduct exclusion, relieving the E&O insurer of a duty under its policy to defend Brasner.


The investor, GIII, had opposed the E&O insurer’s motion, arguing that it was improper for the court to consider facts that go beyond the allegations in the underlying civil actions in determining the duty to defend, and that even if the court considered the guilty pleas, the E&O insurer could not establish that the Brasner’s criminal conviction following his guilty pleas relate to the allegations against Branser in the civil actions.


With respect to the question whether or not the court could consider Branser’s guilty pleas in determining the E&O insurer’s defense duty, Judge Hurley said “The Court finds that when as in the instant case the duty to defend is contested based on facts that are (a) easily verified and (b) will not be resolved by the underlying litigation because they are irrelevant to the underlying claims, a court may consider facts outside of the underlying pleadings in determining whether an insurer is subject to a duty to defend.” Accordingly, Judge Hurley considered Branser’s guilty pleas and ensuing criminal conviction in determining the E&O insurer’s defense duty.


Judge Hurley then compared the criminal charges to the allegations underlying the civil claims in the two lawsuits against Brasner. He concluded that “the claims against Brasner in the underlying cases arise from the exact same misrepresentations that Bransner had been convicted of committing.”


He did note that though the investor’s separate lawsuit against Brasner pertained not to Branser’s misrepresentations to the life insurer (which had been the basis of the criminal conviction), but rather to Branser’s separate misrepresentations to the investor, the exclusion still applied to preclude a defense obligation for the investor’s lawsuit as well as the life insurer’s lawsuit.


Judge Hurley said “even though GIII’s claims are not the direct civil analogue of the criminal charges the way that [the life insurer’s] claims are, they plainly arise at least indirectly from Branser’s criminal conduct.”



Many courts restrict the materials a court may consider in determining an insurer’s defense obligation under a liability insurance policy. Although the formulation differs from jurisdiction to jurisdiction, many courts will often say things such as that the court  may only consider the four corners of the underlying complaint and the four corners of the policy. (This principle is sometimes called the “eight corners rule.”) Had this rule been strictly applied here, the E&O insurer could well have been compelled to defend Brasner, notwithstanding his guilty pleas and ensuing conviction.


The criminal misconduct exclusion clearly contemplates that the insurer has no defense obligation in the event that the insured has engaged in criminal misconduct, if an adjudication has established that the misconduct occurred.  This exclusion would not be worth very much if the insurer were unable to rely on extrinsic evidence of a criminal conviction to context a defense duty under the policy. Judge Hurley’s pragmatic conclusion that the E&O insurer here could rely on the extrinsic evidence of Brasner’s conviction is interesting – you don’t often think about it, but it isn’t self-evident from the policy what the insurer may rely on to substantiate that an adjudication of preclusive conduct has occurred. Judge Hurley’s opinion provides at least some guidance in that regard.


Judge Hurley’s conclusions about the extent of the elationship between the criminal conviction and the underlying claims necessary in order for the exclusion to be triggered is also interesting, particularly his conclusion that the exclusion precluded coverage even for the investor’s claims against Brasner. The fact that the criminal conviction was based on misrepresentations to the life insurer but that the investor’s civil lawsuit was based on separate misrepresentations to the investor was not enough of a difference to avoid the exclusion’s preclusive effect. The exclusion’s use of the work “indirectly” was a critical aspect of Judge Hurley’s opinion in that regards, which is a reminder that the specific wording of policy exclusions can have a significant effect on coverage.


Though Judge Hurley found the relationship between the criminal conviction and the underlying claims was sufficient to preclude coverage, the fact that the question was asked and had to be answered is a reminder that the mere fact that an insured person had pled guilty to a criminal charge is not alone by itself enough to preclude coverage. There must be a connection between the criminal conviction and the separate allegations to preclude coverage for the separate claim. There must be a factual connection between the conviction and the separate allegation to preclude coverage. Judge Hurley did not consider how direct that connection must be in order to preclude coverage, he found only that the connection was sufficient here to trigger the exclusion. But the implication is that there could be circumstances where the connection was too tenuous for the exclusion to be triggered, even if there had been a criminal conviction.  


The Latest FDIC Failed Bank Lawsuit – With an Interesting Twist: On June 17, 2013, the FDIC, in its capacity as a receiver of the failed Advanta Bank, filed a lawsuit against Dennis Alter, the bank’s former Chairman, and William Rosoff, the bank’s former Vice Chairman. Even though the bank was chartered in Utah and had its headquarters in Draper, Utah, the FDIC filed its lawsuit in the Eastern District of Pennsylvania. The FDIC claimed that venue was proper in Philadelphia because, it alleges, that both Alter and Rosoff reside in the Eastern District of Pennsylvania. The Bank failed on March 19, 2010, so the parties must have entered some sort of a tolling agreement; otherwise the FDIC’s lawsuit was not filed until after the three-year statute of limitations had expired.


In its complaint, which can be found here, the FDIC asserts claims for both gross negligence and breach of fiduciary duty. The FDIC seeks damages of in excess of $219 million. The FDIC accuses the defendants of having driven off the Bank’s customer base by “increasing credit card interest rates to unprecedented levels.” The FDIC alleges that the two defendants were grossly negligent and breached their fiduciary duties by “failing to investigate or consider how their re-pricing campaigns would cost the Bank in terms of customer outrage, attrition, credit losses and governmental sanctions.” The FDIC alleges that the two ignored the bank’s own prior bad experience with re-pricing, as well as warning from others within the bank, from consultants, and from more than 35,000 customer complaints. The complaint further alleges that the re-pricing notices sent to customers were deficient and cost the bank $21 million in the form of a restitution order. The re-pricing allegedly caused many customers to leave the bank or to default on their accounts, which allegedly caused the bank millions in losses.


Alter and Rosoff apparently concluded that the best defense is an aggressive offense. On June 17, 2013, the same day as the FDIC filed its lawsuit, the two individuals filed a lawsuit against the FDIC in the Central District of Utah. A copy of the individuals’ complaint can be found here. The individuals allege that the bank “was destroyed by the actions” of the FDIC. They further allege that in an “effort to cover up its own wrongdoing that destroyed the bank and inflicted grievous losses on thousands of people and businesses … the FDIC has embarked on a campaign to blame” them for the bank’s failure. The two individuals allege that the FDIC “concocted” its claims against them despite an earlier settlement agreement and release between the FDIC and all of the bank’s directors and officers. The two individuals alleged they are being “scapegoated” for re-pricing efforts that were forced on the bank the deteriorating economic conditions. The two defendants assert claims against the FDIC for breach of contract, for violating the alleged settlement agreement, and to recover damages that the individuals assert that the FDIC caused the bank.


The two complaints frame what looks like what will be a spirited dispute. Whether or not the individuals’ complaint will succeed remains to be seen, but it is clear that they intend to put up a serious fight. These two cases could prove to be interesting to follow.


With the filing of this lawsuit against the two former Advanta bank officials, the FDIC has now filed a total of 67 lawsuits against former directors and officers of banks that failed during the current bank failure wave, including 23 so far during 2013, compared to 26 during all of 2012.


Special thanks to a loyal reader for sending me copies of both of the Advanta bank complaints.