Insurer's Obligation to Pay for Continued Defense Costs Ends at Sentencing Under NY Law

Insurance Law Alert

July 9, 2015

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Where Policy Excludes Coverage Upon “Final Judgment” For Fraud, Imposition Of Sentence Based On Conviction For Fraud Constitutes Final Judgment, Notwithstanding Pending Appeal.

In Dupree v. Scottsdale Ins. Co., 2015 NY Slip Op. 05405 (N.Y. App. Div. 1st Dep’t June 23, 2015), an intermediate New York appellate court held that the insured plaintiff, a corporate officer convicted of fraud, was not entitled to continued payment of his defense costs under a directors and officers liability policy covering him once he was sentenced on his conviction, notwithstanding his pending appeal. The court ruled that, based on an exclusion in the policy barring coverage for acts of fraud upon a “final judgment against the insured,” and that sentencing constituted final judgment, the insurer’s obligation to pay for the insured’s continued defense ended at the imposition of sentence. Id.

Here, the insured, the chief investment officer of his company, was charged with and convicted of conspiracy to commit bank fraud, bank fraud, and making false statements. The D&O policy issued to the company under which he was an insured excluded coverage, however, for acts of fraud, and the exclusion was operable upon final judgment against the insured. The trial court previously had directed the insurer to pay for the insured’s defense costs in the trial of the criminal action, which it did. Upon conviction, the insured filed an appeal and sought in this coverage action to compel the insurer to pay retroactively certain past incurred costs and to continue to pay his defense costs on the appeal; the insurer moved to vacate the court’s prior order and end its advancement obligation. The trial court denied the insured’s motion, granted the insurer’s motion, and the Appellate Division affirmed.

The First Department noted that the language of the policy exclusion was clear: “[o]nce the final judgment for fraud was entered against [the insured], defendant’s obligation to defend him from those claims ceased.” Id.   In light of the “well-settled” proposition that “imposition of the sentence constitutes the final judgment against the accused” under New York law, the court found that the insurer’s obligation ended at the imposition of sentence. The court further stated that “[w]hile the appeal may, at some point, relieve [the insured] of that judgment, the finality of it is not changed by the pendency of the appeal.” Id.

The First Department further affirmed the trial court’s ruling that, in accordance with the terms of the D&O policy, the insured was obligated to reimburse the insurer for the monies it had advanced for his defense costs.

For more information, please contact Charles W. Stotter.