A New York appellate court has affirmed a trial court’s application of a fraud exclusion and order requiring the insured to reimburse defense costs where the insured had been convicted and sentenced for fraud, holding that the insured’s pending appeal did not change the finality of the criminal judgment. Dupree v. Scottsdale Ins. Co., 2015 NY Slip Op. 05405 (N.Y. App. Div. Jun. 23, 2015).

An insured chief investment officer (CIO) was indicted for conspiracy to commit bank fraud, bank fraud, and making false statements. In a subsequent coverage action, the trial court issued a preliminary injunction directing the insurer to pay for the CIO’s criminal defense under the company’s D&O policy. When the CIO was convicted and sentenced, the insurer sought to be relieved of any defense obligations on the basis that the policy contained a fraud exclusion that was triggered upon a “final judgment against its insured.” The lower court agreed with the insurer and vacated the preliminary injunction notwithstanding an ongoing appeal of the criminal conviction.

The appellate court first explained that it is well settled in the context of criminal prosecution that the imposition of the sentences constitutes final judgment against the accused. According to the court, that “an appeal may, at some point, relieve [the insured] of that judgment” does not change that finality. Finding the exclusion’s language clear, the court concluded that once the final judgment for fraud was entered against the CIO, the insurer’s obligation to defend him ceased. The court also agreed with the trial court’s decision that its findings—that the CIO was excluded from receiving further coverage under the policy and also obligated to reimburse the insurer for the monies it had expended—entitled the insurer to an offset of the CIO’s claim on past legal fees.