The United States District Court for the Southern District of Florida has denied an insured’s request for indemnity from its insurer for the amount owed under a settlement agreement with the state of Florida over grand theft charges against the insured.  The court held that, under Florida law, the settlement does not constitute covered “Loss” because the payments were restitutionary in nature, regardless whether there was an admission of guilt or final adjudication.  Philadelphia Indem. Ins. Co., v. Sabal Ins. Group, Inc., 2017 WL 4310700 (S.D. Fla. Sept. 28, 2017).

The insured, an insurance company, was charged by the state of Florida with five counts of grand theft related to alleged overcharging for worker’s compensation and general liability insurance.  The insured insurance company entered into a stipulated settlement agreement (the “settlement”) under which the state agreed not to prosecute all charges and the insured insurance company agreed to pay over $300,000, which consisted of a payment to the insured’s client, a donation to a victims’ assistance fund, and costs for the investigation.

Prior to the settlement, the insured had sought coverage under a D&O liability insurance coverage part, which insured “wrongful acts.”  The policy excepted “criminal or civil fines or penalties imposed by law” from covered “Loss,” nor did “Loss” include matters deemed uninsurable under the law.  The policy also barred coverage for payments “arising out of, based upon or attributable to” the insureds for either “gaining any profit, remuneration or advantage to which [the insureds] were not legally entitled,” or “any dishonest or fraudulent act or omission or any criminal act or omission by [the insureds].” These exclusions only applied, however, “if a final and non-appealable judgment or adjudication establishes the Insured committed such act or omission.”

While the insurer advanced defense costs, it reserved its rights that the policy would not cover payments of any “restitutionary amount” the insured made to the state.  Once the insured sought indemnity for its settlement payments, the insurer denied coverage for the settlement because: (1) the “Claim” (the service of subpoenas preceding the criminal information filed against the insured) was for non-monetary relief, and the policy excluded non-monetary relief from the definition of “Loss”; and (2) the amounts were uninsurable under Florida law since they would restore the insureds’ “ill-gotten gains,” and were also barred by an exclusion in the policy.  The insurer filed a declaratory judgment action seeking a judicial determination of its rights under the policy.

On the parties’ cross-motions for summary judgment, the court first addressed whether the settlement was a covered “Loss.”  The insured had heavily relied on the argument that the exclusions regarding “ill-gotten gains” and “fraudulent acts” could not apply to preclude coverage because there had not been a judgment or adjudication as required under the policy.  However, the court concluded there was no covered “Loss” in the first place, regardless of the exclusions’ application, because Loss does not include the “restoration of ill-gotten gains” as a matter of law.

The court held that the payments in the settlement were clearly restitutionary in nature, and payments made to resolve the kind of claims made against the insureds can only be said to disgorge the insureds of property to which they were allegedly not legally entitled.  According to the court, it did not matter that the actual settlement agreement did not contain an admission of guilt or use the word “restitution.”