Criminal Conduct Exclusion Bars Indemnity Coverage for Suit Against Insured Who Pled Guilty to Criminal Misconduct

Applying Florida law, the United States District Court for the Southern District of Florida has held that a criminal conduct exclusion barred indemnity coverage for a claim against an insurance broker who pled guilty to insurance fraud.  Certain Interested Underwriters at Lloyds, London v. AXA Equitable Life Ins. Co., No. 10-62061 (S.D. Fla. July 10, 2014).  Previously, the court held that the insurer had no duty to defend the insurance broker against the same claim based on the criminal conduct exclusion. 

An independent insurance broker completed life insurance policy applications for clients and allegedly defrauded insurance companies by providing materially false information on the applications.  The state of Florida brought a criminal proceeding against the broker, and he ultimately pled guilty to multiple counts of insurance fraud.  Meanwhile, the life insurer brought suit against the broker for material misrepresentations on five life insurance applications, and the broker’s insurer filed a declaratory judgment action seeking a judicial determination that it had no duty to defend or indemnify the broker for the life insurer’s suit.  The court previously held that a criminal conduct exclusion applied, so the insurer had no duty to defend the broker against the life insurer’s suit.  The insurer then sought a determination that it had no duty to indemnify the broker in the life insurer’s suit.  At the time the insurer sought judgment in its favor on the indemnification issue, the life insurer had dismissed the claim against the broker without prejudice.

The court held that the criminal conduct exclusion barred indemnity coverage for the life insurer’s suit.  The exclusion precluded coverage for claims “based upon, arising out of, directly or indirectly relating to or in any way involving . . . [c]onduct which is fraudulent, dishonest, criminal, willful, malicious, intentionally or knowingly willful, or otherwise intended to cause damage or injury to personal property” in the event of “an admission by an Insured of such conduct.”  The court held that the broker’s guilty plea—including an admission that the broker had committed insurance fraud on the five applications that were the basis of the life insurer’s suit—barred indemnity coverage for the life insurer’s suit and that the insurer was entitled to a judgment “resolving this question for all time.”

In doing so, the court rejected the life insurer’s argument that the insurer’s suit was moot because the life insurer previously had dismissed its suit against the broker.  The court held that the coverage dispute was ripe for adjudication because the issue was ripe when the insurer filed the declaratory judgment action and the dismissal of the life insurer’s claim against the broker was without prejudice, allowing the life insurer to re-file the suit against the broker in the future.  In the alternative, the court held that its previous decision finding that the insurer had no duty to defend the broker meant that the insurer had no duty to indemnify the broker because, under Florida law, “a finding of no duty to defend . . . necessarily includes a finding that there is no duty to indemnify.”