No D&O Coverage For Civil Theft Judgment

We do not get a lot of D&O coverage decisions in Florida, so any time there is a decision in this area it is noteworthy.  The recent decision in Twin City Fire Ins. Co. v. CR Technologies, Inc., 13-cv-80998-RLR, 2015 WL 1055382 (S.D. Fla. Mar. 11, 2015) does not contain much in the way of analysis, but it does cover several key D&O coverage issues, including what constitutes “Loss”, as well as the application of several common exclusions.  Ultimately, the decision was an easy one for new district court judge Robin Rosenberg, and the reason it covers a lot of ground without delving too deeply into any of the issues is that most of the discussion is dicta.

CR Technologies was the claimant in an underlying state court proceeding in which it accused a business partner of stealing its computer equipment.  The two parties had a contractual arrangement under which CR Technologies leased its equipment to the partner.  At the end of the contract, the partner refused to return the equipment.  CR Technologies sued, asserting a variety of claims, including civil theft and violations of the Florida Deceptive and Unfair Trade Practices Act.  After a trial, the jury returned a verdict in CR Technologies favor, finding that the defendant acted with criminal intent in retaining the property.  In other words, the jury found that the defendant stole the plaintiff’s property.  The verdict amount represented the value of the equipment that was stolen, and the amount was trebled pursuant to Florida’s civil theft statute, Fla. Stat. § 772.11.

In the Southern District of Florida coverage case, District Court Judge Rosenberg held that there was no “Loss” under the policy because the verdict amount represented solely the return of ill-gotten gains.  The decision cited the 11th Circuit’s decision in CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co., 291 F. App’x 220, 223 (11th Cir. 2008) in support of this conclusion, although CNL Hotels applied New York, not Florida, law.  The decision also cited Ranger Ins. Co. v. Bal Harbour Club, Inc., 549 So.2d 1005, 1009 (Fla. 1989) for the proposition that civil theft damages are not insurable as a matter of public policy.

In actuality, theft of property can constitute “loss of use” for insurance purposes, under the second prong of the “property damage” definition in standard commercial general liability policies.  See United States Fidelity & Guaranty Co. v. Mayor’s Jewelers of Pompano, Inc., 384 So.2d 256 (Fla. 4th DCA 1980); Travelers Ins. Co. v. De Bothuri, 465 So.2d 662 (Fla. 4th DCA 1985).  What violates public policy is for the thief to be covered for its own criminal acts, which is ultimately the holding of the CR Technologies decision.

The CR Technologies opinion continues in dicta to state that various exclusions would apply to exclude coverage in any event, including the Criminal Acts Exclusion (also called the Fraudulent Acts Exclusion), which excluded coverage for damages “based upon, arising from, or in any way related to any deliberately fraudulent or criminal act or omission or any willful violation of any law by the Insureds if a judgment or other final adjudication establishes such an act, omission or violation.”  The jury specifically found that the policyholder acted with criminal intent, so the Criminal Acts Exclusion plainly applied.  Ultimately, there were a whole host of reasons why this judgment would never be covered by insurance.

The CR Technologies case is a good example for plaintiffs lawyers of what not to do in an underlying case if you want to preserve insurance coverage for the resulting judgment.  Plaintiffs lawyers often are overly aggressive in trying a case, frequently because their client is convinced that the defendant is evil and wants a jury verdict that extracts a pound of flesh.  If the defendant is deep pocketed then it may not matter whether insurance coverage is available to pay the judgment.  But if the defendant is judgment proof, it is counterproductive for a plaintiff to plead or prove its way out of coverage.

Insurers often will goad plaintiffs into proving themselves out of coverage, in a sort of legal rope-a-dope strategy.  From the insurer’s perspective, if the case is a loser it might as well be a spectacular loser that lets the insurer off the hook and leaves the plaintiff with a large, but uncollectible judgment.

Another mistake made by the plaintiff’s lawyer was letting this case go to verdict.  Given that the Twin City D&O policy had “final adjudication” language, the plaintiff had little to gain by trying the case.  There are a variety of ways to settle cases like this to preserve coverage, and it is nearly impossible for an insurer to rely on D&O policy conduct exclusions like the Fraudulent Acts Exclusion and Criminal Acts Exclusion if the underlying case is settled properly.

If Plan A of settling the case prior to trial is unsuccessful, Plan B should be to drop the fraudulent or criminal act allegations and focus the trial on negligence counts.  It is almost always possible to obtain a verdict based on negligent or reckless conduct.  The resulting jury trial may not be as dramatic, and there may be no treble or punitive damages, but at least coverage will be preserved.