The Conduct Exclusion In D&O Policies: It Is Not As All Encompassing As Insurers Think, Insurance Policyholder Advocate

A common form of the so-called “personal conduct” exclusion found in current directors and officers liability policies provides materially as follows:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured . . . (c) arising out of, based upon or attributable to the committing of any deliberate criminal or deliberate fraudulent act by the Insured if a judgment or final adjudication or any binding arbitration proceeding adverse to the Insured(s) establishes that such deliberate criminal or deliberate fraudulent act was committed.

What happens when an insured has multiple criminal counts brought against him, goes to trial, and prevails as to some of the counts but is convicted as to others? Is there coverage in whole or in part for the defense costs incurred? In this setting, insurers often contend such an exclusion bars all coverage for the insured’s defense costs because of his conviction, irrespective of his exoneration on some of the counts. They are wrong, and a policyholder should not acquiesce to such a position of no coverage.

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