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Coverage for intentional wrongs (e.g., crimes, employment discrimination)

The New York Insurance Department issued a circular in 1994 which sets out the position of a liability insurer faced with a claim for an intentional wrong.

The Department's position is that liability insurance coverage for intentional wrongs is prohibited for two reasons:

a) intentional misconduct lacks the element of "fortuity";
b) indemnification of wrongful conduct that is intentional is against public policy.

According to the Department, courts have held that if the relationship between the wrongdoer's act and the resultant harm is fortuitous, rather than intended, coverage is permitted.

From this discussion, it would appear that an insurer can cover criminal liabilities based on strict liability or negligence, e.g., many of the oil pollution statutes. It would also appear that an insurer cannot cover criminal liabilities based on specific intent, e.g, arson, casting away, or theft. Criminal liabilities based on gross negligence, e.g., manslaughter, are a gray area and probably have to be considered on a case-by-case basis.

[Lest anyone think the law is different in England, it is contrary to public policy there as well to allow an individual to enforce an insurance policy which indemnifies him or her against a fine or other punishment imposed for the commission of a crime.  See, Hazelwood, P&I Clubs: Law and Practice, (3rd ed. 2000), pp. 149-152; J Birds, Modern Insurance Law (4th ed. 1997), pp. 234-243; Chitty on Contracts (27th ed. 1994) para 39-019; M.A. Clarke, The Law of Insurance Contracts (2nd ed. 1994) ch 24-4A; Lancashire County Council v. Municipal Mutual Insurance Ltd. [1996] 3 WLR 493, 502B-G; Askey v. Golden Wine Co. [1948] 2 All ER 35, 38C-E (Denning, J.); Report of the Law Commission, Part IV, Exemplary Damages, at para 4.108-4.112.]

The Insurance Department also uses the distinction between fortuitous and intentional wrongs to establish its position on coverage for racial discrimination. Discrimination based on disparate treatment by employers is considered intentional and cannot be covered. Discrimination based on disparate impact is not necessarily intentional and can be covered. The same applies to employers who are held vicariously liable for the discriminatory actions of their employees, e.g., most cases of sexual harassment aboard ship. Coverage is permitted because there was no intentional conduct on the employer's part.

Unfortunately, the Department does not apply this analysis to coverage for punitive damages. It says only that, in conformity with court decisions on the subject, it remains against public policy to provide insurance coverage for punitive damages. The fortuitous/intentional distinction should logically be applied to punitive damages as well. If one of its insureds were held liable for punitive damages, an  insurer should be able to reimburse him without violating public policy, unless there had been a showing of recklessness which equated to willful misconduct.

Club Boards looking to reimburse members for criminal fines and/or punitive damages should bear in mind that the law does not prohibit them from exercising their discretion to reimburse the member after the event. As Judge Breitel wrote, when he was on the Appellate Division:

There may be no dispute that one may not contract for indemnification for the consequences of a criminal or illegal act to occur in the future. E.g., Mattera v. Mele, 263 App.Div. 550, 33 N.Y.S.2d 545; 42 C.J.S. Indemnity s 7, at page 573. But the distinction has always been sharply made, with contrary effect, with respect to agreements to indemnify one post factum for the financial consequences of a crime or illegal act. In other words, one may make an agreement to be indemnified or to indemnify with respect to a crime or illegal act which occurred prior to the making of the agreement. This has been the law for many years throughout the United States and in this State. Armstrong v. Toler, 24 U.S. (11 Wheat.) 258; Hanauer v. Doane, 79 U.S. (12 Wall.) 342, 348; Curtiss v. Leavitt, 15 N.Y. 9, 244-247; Burton v. Stewart, 62 Barb. 194; Given v. Driggs, 1 Caines 450 (Kent, J.); Restatement, Contracts, s 597, Illus. 2; 6 Williston, Contracts {Rev. ed.] s 1751. [other citations omitted] See, for an early interesting discussion of the policy considerations, De Groot v. Van Duzer, 20 Wend. 390, 406-407, dissenting opinion by Verplanck, Sen.

Feuer v. Menkes Feuer, Inc., 8 A.D.2d 294, 297-298, 187 N.Y.S.2d 116, 120-121 (1st Dep't 1959)

The Feuer rationale suggests that there must be new consideration for an agreement to indemnify with respect to a crime which has already occurred. In the context of Board deliberations, I would suggest that the Directors could expressly condition the exercise of their discretion on the member's agreement to renew, something most directors would consider the right thing to do.