No Coverage for Receiver’s Claw Back Claim Against D&O Because Profit Exclusion Applied and Claim Did Not Arise Out of a “Wrongful Act”

The U.S. District Court for the Middle District of Florida, applying Florida law, held that a directors and officers liability insurance policy did not provide coverage for a claim asserted by a receiver seeking the return of bonus and other compensation amounts paid to a former director and officer of the company because (1) the policy’s profit exclusion applied; and (2) the claw back claim did not arise out of a “Wrongful Act.”  Desai v. Navigators Ins. Co., 2019 WL 3068398 (M.D. Fla. July 12, 2019).

In state receivership proceedings, the receiver sought to void transfers of bonus and other compensation amounts to a former director and officer of the insured company.  The former director and officer sought coverage under the company’s D&O policy in connection with this claw back claim.  The insurer denied coverage for several reasons, including that the claw back claim did not involve a “Wrongful Act”—defined as “any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty”—and that the policy’s profit exclusion applied to bar coverage for Loss arising out of “the gaining of any profit or advantage to which an Insured was not legally entitled.”  The insured filed a coverage action.

On cross-motions for summary judgment, the court ruled in favor of the insurer.  First, the court held that the profit exclusion applied because the state trial court’s grant of summary judgment requiring the insured to return the subject amounts constituted a final judgment finding that the insured was not legally entitled to the amounts, thus triggering the profit exclusion.

Second, the court held that the claw back claim was not a claim for a “Wrongful Act” because the claim was not triggered by any act, error or omission by the insured person or the company; rather, it arose from the fact that the company entered into receivership proceedings within a year after making the payments, thereby making the transfers voidable under Florida law.