Insurer not required to provide convicted exec D&O coverage

Axis Surplus Insurance Co. is not obligated to provide directors & officer's liability coverage to an executive convicted of felony charges because of a wrongful act exclusion in its policy, says a federal appeals court, in affirming a lower court ruling.

In November 2015, following a six-week trial, Edward Morris Weaver was convicted by a Central Islip, New York, jury on felony charges of conspiracy and fraud filed by the U.S. Justice Department in the sale of candy vending machine business opportunities, according to the Justice Department. Mr. Weaver had been CEO of Deer Park, New York-based Multivend L.L.C., a now-defunct vending machine company, according to court papers.

Mr. Weaver had sought coverage under a claims made D&O policy covering the period February 2010 through February 2014 that had been issued by Alpharetta, Georgia-based Axis, a subsidiary of Pembroke, Bermuda-based Axis Capital Holdings Ltd., according to Monday's ruling by the 2nd U.S. Circuit Court of Appeals in New York in Edward Morris Weaver v. Axis Surplus Insurance Company. The policy included a provision excluding coverage for a demand arising from a “wrongful act.”

On October 2007, the securities division of the Maryland attorney general's office had sent a letter to Multivend stating the company “may be offering and selling business opportunities in violation of the disclosure and antifraud provisions of the Maryland Business Opportunities Sales Act,” and suggesting that the company “makes unlawful earnings representations” about its business opportunity, according to court papers.

After his indictment on criminal charges, Mr. Weaver sought coverage under his D&O policy from Axis, which denied coverage in December 2012, in part because of the policy exclusion.

Mr. Weaver filed suit against the insurer in September, 2013 charging it with breach of contract. The U.S. District Court in Central Islip, New York denied Mr. Weaver coverage in October 2014, which was upheld in Monday's unanimous ruling by a three-judge appeals court panel.

The Maryland letter was a demand that fell under the policy's wrongful act exclusion, says the appeals court panel. “Because the November 2007 letter constituted a 'demand' as a matter of New York law … the policy unambiguously excluded coverage for Weaver's defense of (the Department of Justice) action on the grounds that it involves the same facts and circumstances as the letter,” said the panel, in affirming the lower court ruling.