The insurer shall not be liable to make any payment for loss arising from, by reason of or in connection with:

(K) the fraudulent, dishonest or criminal acts of the assureds;

Home H36667F REV. 10-91

The above exclusion may appear reasonable because these actions are not normally insurable as a matter of public policy, nor are they generally indemnifiable by state law. A potential problem with such language, however, is that sometimes there is no specific exception to the exclusion which would allow coverage for defense when dishonesty is alleged but not proven. Many D&O forms, however, do contain language that amends the exclusion to only apply when a final judgment establishes that such fraudulent, dishonest or criminal acts did in fact occur. An example of this language is shown below.

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors or Officers:

brought about or contributed to by the fraudulent, dishonest, or criminal acts of the Directors or Officers; provided, however, that this exclusion shall not apply unless it is established in fact that such Claim was brought about or contributed to by fraudulent, dishonest or criminal acts of the Directors and/or Officers;

Great American D100A (2/90)

Language requiring an establishment “in fact” as shown in the above example or, in some policies, a “judgment or other final adjudication”, means that the exclusion only applies when directors and officers have been found by a court to be guilty of dishonesty or other excluded acts. Such a requirement appears desirable from the insured's standpoint, especially considering that a large percentage of claims result in voluntary settlement without final adjudication or an admission of wrongdoing.

When a defendant insured enters into a voluntary settlement that requires the insurer's consent, the settlement effectively prevents an adjudication on the issue of dishonesty, which in turn prevents the exclusion from applying. Once the insurer consents to a settlement, the courts generally have barred any further litigation by the insurer to establish the insured's dishonesty.

Some policies contain an exclusion that allows coverage for dishonest, fraudulent or criminal acts if a judgment or other final adjudication fails to establish that such acts actually occurred. It is not always clear when dishonesty “in fact” occurs. However, this term may imply less of a threshold for proof than adjudication and, therefore, language requiring a final adjudication is preferable. Use of the term in fact may not bar the insurer from separately litigating the issue of an individual insured's dishonesty.

There is great variety in the wording of dishonesty exclusions. As illustrated below, many insurers combine fraudulent, dishonest and criminal acts in a single exclusion. Others break these offenses into separate, individual exclusions. Even when a unitary exclusion is used and is subject to an exception, the exception may only extend to one act, such as dishonesty, as in the example below taken from an old policy form: