A panel in the California Court of Appeals, in an unpublished opinion ( Stein v. Axis Ins. Co . (Cal. App., March 8, 2017, No. B265069) 2017 WL 914623), issued 8 March 2017, argued that a political exclusion requiring "final judgment" did not support a refusal to pay the policyholder's insurance costs by the Houston Casualty Company (HCC) following a court of court ruling where the policyholder could still pursue an appeal.
Michael Stein, a founder of Heart Tronics, was accused in federal court of criminal charges including securities fraud. In 2013, a jury sentenced Stein to all charges and he was sentenced to a long prison period. Following his conviction, Stein offered his criminal appeal to HCC, Heart Tronics' other warehouse D&O insurer, after the coverage of Heart Tronic's main insurance company Axis Insurance Company had been exhausted. HCC denied coverage that was partly due to coverage being excluded from the exclusive misleading policies. Stein sued HCC (like Axis on the theory that it had conspired with HCC to deceive him), and the trial held the insurers' demurrers and dismissed Stein's claims with prejudice.
The Appeal Court in California reverses HCC, rejects HCC's argument for excluding misleading irregularities. The exclusion of misleading irregularities provided that " in addition to defense costs the insurer shall not pay any loss in connection with any claim caused by a precautionary breach," but only "if it has been … a final judgment negative to [the] insured person in the underlying measure. "Significant, while the exclusion explicitly carved out" defense costs ", the exclusion further provided that" [i] finally it is determined that [the exclusion] applies "the policyholder would repay all insurance costs that HCC paid on behalf of the policyholder. HCC argued that Stein's conviction in the court of law was a "final judgment" that was sufficient to trigger the exclusion because it was "definitively under federal law until its reverse". The HCC therefore justified not only the exclusionability covered by Steins trial level defense, but it also prevented any obligation to pay Stein's defense costs in the event of an appeal, given the waiver of the waiver.
The Court rejected HCC's argument that "final judgment" in the policy means "final under federal law until reversed". The court declared that the policy did not mention federal law or any difference between federal and state procedures. Furthermore, the Court commented that "a thing that is" final to reverse "is not final" and that "an appeal court may make a judgment and a court of justice may with the added benefit of greater finality." The Court also appointed excellent cases such as HCC cited, which interpreted various political languages that only require a judgment or other final judgment. "The Court's analysis suggests that the word" judgment "without the adjective" last "before It could include an appeal judgment but the use of the policy by The term "final judgment", instead of a "judgment", meant that a court judge alone would not trigger the exclusion.
Stein the case teaches valuable lessons to the policyholders. pay close attention to the proposed formulation of the policy's misleading exclusion of irregularities, which is usually intended to be applied intentionally Policyholders should investigate which events trigger the exclusion, as well as the existence and extent of any outlay (eg. defense costs) or repayment obligations. Important Considerations Include:
- Is the exclusion triggered by a final judgment, "a" final judgment "or a" judgment after exhaustion of all appeals ] " Or can it be triggered solely by a "judgment?" "
- Are defense costs cut out from the exclusion? Many forms of policy prepare such expenses.
- Is there an obligation to repay defense costs if the convicted sentencing is confirmed in appeal and, if so, at what level of appeal? Many policies do not impose any obligation on
Advisory Council when choosing a D&O policy is an important step to ensuring that your board members and officials are not granted their own appeals.