Does D&O Insurance Cover Criminal Acts?

The question of whether D&O insurance covers criminal acts is a nuanced one, and the general answer is no, D&O insurance typically does not cover criminal acts themselves, nor does it cover fines or penalties resulting from them. However, there's a critical distinction to be made:

What D&O Insurance Generally Doesn't Cover for Criminal Acts:
• Fines and Penalties: D&O policies almost universally exclude coverage for criminal fines, penalties, restitution, or punitive damages. The rationale behind this is that insurance should not serve to indemnify individuals or entities for the consequences of intentional wrongdoing, as this would undermine the deterrent effect of legal sanctions and violate public policy.
• Illegal Personal Profit or Remuneration: If a director or officer gains an illegal personal profit or remuneration through their criminal actions (e.g., embezzlement, insider trading, kickbacks), D&O policies will exclude coverage for losses related to these ill-gotten gains.
• Actual Criminal Liability: Once a final adjudication, judgment, or admission of guilt establishes that a director or officer committed a criminal act, the D&O policy's "conduct exclusion" (also known as a "dishonesty" or "fraud" exclusion) will typically apply, retroactively denying coverage for that specific conduct.

What D&O Insurance May Cover Related to Criminal Allegations:
The key area where D&O insurance can provide coverage, even in the face of criminal allegations, is for defense costs. This is a crucial distinction:
• Defense Costs Prior to Adjudication: Most D&O policies operate on an "innocent until proven guilty" principle. This means that if a director or officer is accused of a criminal act, the policy will generally cover their legal defense costs (attorney fees, investigation costs, expert witness fees) until there is a final, non-appealable judgment or admission of guilt that proves the criminal conduct. The policy will advance these defense costs, even if the allegations involve criminal wrongdoing.
• The "Final Adjudication" Trigger: The wording of the "conduct exclusion" is critical. The best D&O policies will stipulate that the exclusion for criminal acts only applies after a "final, non-appealable adjudication" or a "final judgment" establishes the criminal conduct. This ensures that the defense costs are covered throughout the legal process, including appeals, until a definitive determination is made.
• Severability: Strong D&O policies will also include a "severability" clause. This clause ensures that the dishonest or criminal act of one insured individual is not imputed to other "innocent" insured individuals. For example, if one executive commits fraud, the D&O policy should still cover the defense costs of other board members who were unaware of and not involved in the criminal activity.

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06/23/2025