D&O insurance typically defines the term “Claim” to include criminal charges after indictment. However, the coverage available under the policy for criminal proceedings is excluded in the event of a final adjudication determining that precluded misconduct actually took place. But what happens to the coverage if there is no final adjudication but rather the criminal charges are resolved through a negotiation that results in a monetary payment by the criminal defendants? In a recent decision, the Eleventh Circuit determined that the applicable D&O insurance policy’s coverage did not extend to amounts paid in negotiated resolution of criminal charges, despite the absence of a final adjudication – not by operation of the exclusion, but because of the nature of the payments. 



Sabal Insurance Group, an insurance agency, and its CEO, were criminally charged with grand theft in connection with the alleged overcharging of insurance premiums paid by certain governmental agencies. The criminal defendants ultimately settled the charges by stipulated settlement agreement in which the criminal defendants agreed to make three payments: (1) payment to the governmental agency of approximately $180,000 (“the Payment”); (2) a donation of $100,000 to a charitable organization (“the Donation”); and (3) a payment of costs of investigation to the governmental agency of $20,000 (“the Costs of Investigation”).


When Sabal received the first subpoena in connection with the premium overcharge investigation, it submitted the matter to its insurer, which accepted the subpoena as a Claim, subject to a reservation of rights. As the investigation unfolded and after the entry of the criminal information, the carrier issued updated reservations of its rights. After Sabal agreed to pay the various amounts in connection with the settlement, it sought indemnification for the payment amounts from its insurer. The insurer denied an obligation to indemnify the company for the amounts because, the insurer said, the amounts were restitutionary in nature and therefore not covered under the policy.


The insurer filed an action in federal court seeking a judicial declaration that its policy did not cover the amounts paid in the settlement. The parties filed cross-motions for summary judgment. The district court granted the insurer’s summary judgment motion, ruling that the insurer was not obligated to indemnify Sabal for the Payment and the Costs of Investigation because the amounts were restitutionary in nature, and because the Donation represented a criminal penalty. Sobel appealed the district court’s ruling to the Eleventh Circuit.


The August 26, 2019 Opinion

In an August 26, 2019 opinion marked “do not publish” and written for a unanimous three-judge panel by Judge Mark Walker, the Eleventh Circuit affirmed the district court’s holding. The appellate court agreed with the district court that the Payment and the Costs of Investigation amounts were restitutionary in nature, and that the Donation represented a criminal penalty, and therefore that coverage for all three amounts was precluded from coverage under the policy.


In reaching the conclusion that the policy provided no coverage for the Payment, the Court first agreed with the district court’s determination that as a matter of Florida law, an insurance contract precludes coverage for the restitution of ill-gotten gains. Public policy considerations under Florida law preclude coverage because “the restitution of ill-gotten gains could encourage commission of a wrongful act” and also because “excluding coverage would deter wrongdoing, while allowing coverage would only compensate the wrongdoer.”


Sabal tried to argue that coverage for the payment of ill-gotten gains is precluded only if the occurrence of wrongdoing has been determined by a final and non-appealable adjudication, as required by the policy’s conduct exclusions. The appellate court rejected this argument, agreeing with the district court that under Florida law, an exclusionary provision does not apply unless there is coverage in the first place.  The appellate court said that “because the policy does not provide coverage for the restitution of ill-gotten gains, there is no need to look to the exclusionary provision.”


The appellate court then agreed with the district court that the amount of the Payment represented the payment of ill-gotten gains. In arguing against this conclusion, Sabal relied on several statements in the settlement agreement that the amounts were being paid in resolution of disputed claims and that the payments were made “without there being any admission of guilt.”  The district court had rejected these arguments because, the appellate court said, the payments were clearly restitutionary in nature.  The appellate court said that the Payment was made to resolve a charge of grand theft, and the amount of the payment is equal to the amount of Sabal’s “ill-gotten gains” (or at least those within the statute of limitations). The provisions in the settlement agreement in which Sabal did not admit guilt “are irrelevant, because the admission of guilt is not required for a payment to be the return of ill-gotten gains.”


The appellate court also agreed that the amount of the Donation does not represent covered loss; while the Donation itself did not represent restitution, coverage for the amount nevertheless was excluded because the policy specifies that criminal or civil fines or losses are precluded from Loss covered under the policy. The amount, the court said, was agreed to between Sabal and the state of Florida to resolve criminal charges and “accepted and ratified” by the court, and therefore the Donation is a “penalty imposed by law” for which coverage is precluded under the Policy.


Finally, the court found that coverage for the Investigative Cost portion of the settlement was also precluded because the payment of the Investigative Cost was also restitutionary in nature.



Woven through this insurance coverage opinion is an underlying notion that wrongdoers should not be able to evade the consequences of their misconduct through the protection of insurance. Whatever the theoretical merits may be of this underlying assumption as a general matter, I think there is an argument that this principle is irrelevant in the context of this insurance coverage dispute.


To be sure, the insurance agency was accused of felony misconduct, and we can all agree that that is bad. However, there was never a point in this process where it was proven or established that the agency had actually engaged in the alleged misconduct. The settlement was expressly intended to resolve a contested matter, and the State of Florida expressly agreed to a document specifying that the criminal defendants denied any admission of guilt. At no point in the criminal proceeding did the matter move beyond the presumption of innocence which in our system of justice applies to anyone accused of a crime. Moreover, as far as I can tell, there was nothing in the criminal defendants’ settlement with the State of Florida that precluded them from seeking insurance for the payment amounts.


The court’s analysis of this coverage matter only makes sense if the agency was in fact guilty of the criminal misconduct of which it was accused. Indeed, the amounts the agency supposedly improperly gained are only “ill-gotten” if the agency actually violated the law. But there was never a determination by any finder of fact that the agency in fact that realized “ill-gotten” gains. All we have are mere allegations, which the parties resolved by mutual agreement of disputed matters.


For me, because there has been no finding of fact that the agency actually committed the criminal misconduct of which it was accused, and because there has been no actual factual determination that the amounts in question were in fact “ill-gotten,” it is not appropriate for the Court to disregard the after adjudication requirement of the conduct exclusions. The effect of the Court’s logic here, by which coverage is precluded based only on unproven charges, disregards and frustrates the purposes of the actual policy language to which the parties agreed, and substitutes coverage preclusive terms and effects that are found nowhere in the policy language. And while every contract incorporates the requirements of law, Florida’s law precluding coverage for restitutionary amounts only applies to “ill-gotten gains” – which is irrelevant if there has been no determination that the amounts are in fact “ill-gotten.”  All of these arguments to me apply equally to the agency’s agreement to pay the Costs of Investigation as well.


The appellate court’s conclusion that the Donation represents a “penalty” for which coverage is precluded under the policy arguably is also misplaced. The carve-out in the policy’s definition of Loss applies only to criminal or civil fines or penalties “imposed by law.” I think there is a good argument to be made that the agency’s agreement to make the Donation was voluntarily undertaken in order to resolve disputed allegations, and not a penalty imposed by law. Obviously the district court and the appellate court disagreed with this analysis.


The bottom line for me is that if coverage precluding principles are going to be inferred into a bargained- for insurance contract, these extracontractual principles should be construed and applied very narrowly, so as not to frustrate the intended purposes of the parties’ contract. I think there is a good argument to be made here that the court has applied the extracontractual legal principles in an overly-broad way that undermines the intent and purpose of the insurance contract as reflected in the after adjudication language in the conduct exclusions.


I suspect that many readers may disagree with my analysis. I hope these readers will please provide their contrasting points of view using this site’s comment feature.


An August 29, 2019 post on the Squire Patton Boggs law firm’s Insurance and Reinsurance Disputes Blog about the Eleventh Circuit’s ruling can be found here.