D&O Coverage for Fines and Penalties?
By Brit Weimer
Most D&O policies have an exclusion for fines, penalties, and multiplied damages. These exclusions are broadly construed, in light of public policy limitations on insurance damages that are punitive rather than compensatory in nature.
For example, in Genesis Insurance Co. v. Crowley, 495 F. Supp. 2d 1110 (D. Colo. 2007), the Genesis D&O policy excluded from the definition of "loss" any "criminal or civil fines or penalties imposed by law, multiplied portions of damages in excess of actual damages, taxes, or any matter which may be deemed uninsurable under the law pursuant to which this Policy shall be construed." The Crowley court noted that the exclusion should be construed in light of public policy limitations on insuring damages for restitution or disgorgement of property wrongfully acquired. Thus, as in many coverage cases of first impression, the courts frequently look for guidance to other jurisdictions and to general principles of public policy.
The rationale for these exclusions is that fines and penalties are considered punitive in nature, and that insuring such amounts could be contrary to public policy, especially where the intent is to punish wrongdoing. This is reinforced by Colorado’s public-policy prohibition of liability insurance coverage for punitive damages. “Colorado prohibits an insurance carrier from providing insurance coverage for punitive damages.” Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo. 1996). “Punitive damages are not meant to reimburse an injured plaintiff for harm suffered by that individual, but rather are intended to punish the defendant for his wrongful acts and to deter similar conduct in the future.”
“… Punitive damages are not meant to reimburse an injured plaintiff for harm suffered by that individual, but rather are intended to punish the defendant for his wrongful acts and to deter similar conduct in the future.”
Some courts allow coverage for civil fines or penalties if they are compensatory rather than punitive, and there is no express legal prohibition against indemnification or insurance of such amounts. For example, in J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 183 N.E.3d 443 (N.Y. 2021), the court held that a $140 million payment by Bear Stearns to the SEC, labeled as "disgorgement," was insurable under its D&O policy. The payment was calculated based on client gains and investor losses, serving a compensatory purpose rather than a punitive one. The court reasoned that such a payment did not constitute a "penalty imposed by law" and was therefore not excluded from coverage.
Since there are no standard-form D&O policies, it is important to analyze the language of the particular policy, in light of state law.
If you would like help evaluating the pros and cons of submitting a D&O insurance claim on behalf of the association, the experienced lawyers at Moeller Graf are available to assist. This information should be viewed as informational and not direct legal advice.