The U.S. District Court for the Middle District of Pennsylvania, predicting Pennsylvania law, has held that restitution for criminal acts is uninsurable as a matter of public policy. Darwin Nat’l Assurance Co. v. Luzerne Cty. Transp. Auth., 2016 WL 1242283 (M.D. Pa. Mar. 30, 2016). The court accordingly found that criminal proceedings against a public official fell within a public officials liability insurance policy’s limit of liability for claims exclusively seeking non-monetary relief. The court further held that a second public official’s guilty plea barred coverage for him pursuant to the policy’s exclusion for deliberate misconduct.
The Pennsylvania Office of Attorney General initiated criminal proceedings against the former executive director and former operations manager of the insured, a county transportation authority, alleging that the individuals conspired to create false bus ridership data to defraud the Pennsylvania Department of Transportation and obtain excess grant money, which was allegedly used to pay various operating expenses of the transportation authority, including the officials’ own salaries. The executive director subsequently pleaded guilty to several counts of tampering with public records, a third-degree felony. The two individuals sought coverage for the criminal proceedings under the transportation authority’s public officials liability insurance policy.
The court first determined that no coverage was available for the executive director as a result of his guilty plea. The policy contained an exclusion for “any Claim brought about or contributed to in fact by … any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured.” The applicability of the exclusion required a final adjudication or an admission by the insured, and the exclusion further provided that the insured must reimburse any defense expenses advanced by the insurer. The court held that the executive director’s admission to submitting false bus ridership data and to committing a third-degree felony triggered the exclusion, and the court ordered the executive director to reimburse the insurer for the $50,000 in defense expenses that had been previously advanced by the insurer.
Next, the court considered which of the policy’s two insuring agreements applied to the criminal proceedings brought against the operations manager. The insurer argued that the proceedings fell within the insuring agreement for claims exclusively seeking non-monetary relief, which contained a limit of liability of $100,000 for defense expenses only. The operations manager argued that the proceedings fell within the public officials wrongful acts coverage part, which provided a $1,000,000 limit of liability for loss, with coverage for defense expenses available outside the limit. The operations manager argued that the criminal allegations mandated a sentence including restitution, thus constituting monetary relief that would trigger the public officials wrongful acts coverage part.
The court agreed with the insurer, holding that the insuring agreement for claims seeking only non-monetary relief applied. In so holding, the court rejected the operation manager’s argument that the larger limit of liability applied because the policy’s definition of “Loss” did not specifically exclude restitution. Moreover, the court predicted that the Pennsylvania Supreme Court would reject an attempt to seek coverage for restitution for criminal acts on grounds of public policy. Specifically, the court stated that “the Pennsylvania Supreme Court would reject the insured’s petition for greater insurance coverage based on restitution arising out of criminal acts, especially here, where the alleged conduct involved an intentional criminal conspiracy to commit fraud” and that to allow such coverage “would effectively permit the purchase of a ‘freedom of misconduct’ that is inconsistent with the purpose of restitution, which is to impress upon the offender the gravity of his actions.”