Tokio Marine unit not obligated to indemnify agency in theft

A Tokio Marine Group unit is not obligated to indemnify an insurance agency and its owner who were charged with grand theft under their directors and officers liability insurance policy, says a federal appeals court, in upholding a lower court ruling.

Fort Lauderdale, Florida-based Sabal Insurance Group provided a workers compensation and general liability insurance policy to Miami-based Quality Aircraft Services Inc. that was paid for by the Miami-Dade Aviation Department, according to Monday’s ruling by the 11th U.S. Circuit Court of Appeals in Atlanta in Philadelphia Indemnity Insurance Co. v. Sabal Insurance Group Inc., Ian Marshall Norris.

The aviation department was concerned it was being overcharged by Sabal, and initiated an investigation that was carried out by the Miami-Dade County Office of the Inspector General over the course of 30 months.

Following the investigation, Sabal’s president and CEO, Mr. Norris, was arrested, and Mr. Norris and the agency were charged with five counts of grand theft, according to the ruling.

Under the alleged scheme, according to the ruling, Sabal had overcharged Quality Aircraft and the aviation department by creating invoices with fraudulently inflated premiums. 

Their D&O insurer, Tokio Marine unit Philadelphia Indemnity, alleged the investigation determined that Sabal fraudulently obtained more than $416,000, but the amount obtained within the statute of limitations was $180,807.87.

Sabal and Mr. Norris settled the charges with the state of Florida, under an agreement that provided they make three payments: a $183,807.87 payment to the aviation department; a $100,000 donation to a memorial fund; and $20,000 payable to the aviation department to cover investigation costs.

Philadelphia Indemnity funded Sabal’s defense, subject to a reservation of rights, but refused to indemnify Sabal in the matter. It filed suit in U.S. District Court in Miami seeking a declaratory judgment on the issue. The District Court ruled in Philadelphia Indemnity’s favor, which was affirmed by a unanimous three-judge appeals court panel.

The ruling said it agreed with the District Court that “as matter of Florida law, insurance contracts do not insure the restitution of ill-gotten gains. Sabal’s arguments to the contrary are unavailing.”

The $183,807.87 payment to the aviation department is the restitution of ill-gotten gains, said the ruling. “It was made to resolve a criminal information charging Sabal with grand theft, and the amount of the Payment to (the aviation department) is equal to the amount of Sabal’s alleged ill-gotten gains that occurred within the statute of limitations.”

The panel also agreed with the District Court that neither the donation nor the investigation costs were covered losses under the policy.

Philadelphia Indemnity’s attorney, Valerie Shea, a partner with Goldberg Segalla LLP in Miami, said, “I think it’s an important decision that affirms the fact that one cannot insure against intentional misconduct and that ill-gotten gains will not be covered as a matter of contract interpretation and public policy.”

The agency and Mr. Norris’ attorney could not be reached for comment.

Earlier this month, a federal appeals court upheld a lower court decision and ruled Philadelphia Indemnity must pay to replace all the siding on a condominium association’s buildings, in a case where there was no longer a match available for the structures’ undamaged siding.