Applying Virginia law, the Fourth Circuit has held that a D&O policy did not cover civil and criminal investigations where four of the insured’s officers pled guilty to fraud and bribery charges. Protection Strategies, Inc. v. Starr Indem. & Liab. Co., No. 14-cv-1972 (4th Cir. May 27, 2015). The Fourth Circuit also affirmed the insurer’s right to recoup defense expenses advanced during the investigations. Wiley Rein represented the insurer.

In 2012, the government initiated civil and criminal investigations into potential fraudulent conduct by the insured, a government contractor, and certain of its officers in connection with the procurement of government contracts. The company subsequently filed a coverage action against its insurer to recover defense costs incurred in the investigations under two successive private company D&O policies. The insurer reimbursed those costs but filed a counterclaim for recoupment after four of the company’s officers pled guilty to criminal charges for fraud or conspiracy to commit fraud. The district court granted the insurer’s motion for summary judgment, concluding that the earlier of the two policies applied; that the guilty pleas triggered the policy’s profit; dishonesty, prior knowledge and warranty exclusions; and that the insurer was entitled to recoupment of all defense expenses.

The Fourth Circuit found no reversible error in the district court’s decision and rejected as “without merit” each of the company’s contentions. First, the court cited decades-old precedent in rejecting the argument that the insurer waived the right to rely on the prior knowledge exclusion, included only in the earlier policy, by assuming that the later policy was triggered before it learned that the investigations began during the earlier policy period. The court also rejected arguments that the district court “impermissibly resolved issues of facts” in determining, among other things, that a warranty letter was part of the earlier policy. Accordingly, the court affirmed that the guilty pleas triggered multiple exclusions in the earlier policy, barring coverage for all defense costs incurred in the investigations. Finally, the court agreed that the duty-to-defend policy’s recoupment provision entitled the insurer to recoup all defense costs, including interest, and rejected the argument that the provision impermissibly eliminated the insurer’s duty to defend retroactively.