SERIO v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH PA (2005)

Judgment, Supreme Court, New York County (Helen E. Freedman, J.), entered February 24, 2004, which granted defendant's motion to dismiss the complaint, and order, same court and Justice, entered October 20, 2004, which, to the extent appealable, denied plaintiff's motion to renew, unanimously affirmed, without costs.

The liquidator of the now defunct Nassau Insurance Company seeks, under Insurance Law § 3420(a)(2), to recover on the judgment awarded against Richard DiLoreto, Nassau's former president, in Serio v. Ardra Ins. Co., 304 A.D.2d 362, 761 N.Y.S.2d 1 [2003], appeal dismissed 100 N.Y.2d 576, 764 N.Y.S.2d 385, 796 N.E.2d 477 [2003], lv. denied 100 N.Y.2d 516, 769 N.Y.S.2d 202, 801 N.E.2d 423 [2003].   The basis of the recovery is a Directors and Officers Liability and Corporation Reimbursement insurance policy (the D & O policy) issued by defendant.   Defendant was entitled to rely on the “personal profit or advantage exclusion” and “dishonesty exclusion” in refusing to pay for the judgment.   Plaintiff maintains his claim against the president in the underlying action was based on Insurance Law § 1505(a), which simply prohibits a person in control of an insurance company from involving it in transactions with a related party that are not “fair and equitable” to the insurer.   In convincing the jury in the underlying action of a violation of § 1505(a), plaintiff had argued that the president made personal use of Nassau's funds rather than retaining them for appropriate purposes.   Thus, plaintiff himself has previously taken the position that the president used Nassau for “personal profit or advantage,” an event which the D & O policy excluded from liability coverage.

Plaintiff now emphasizes that there is no indication the jury ever specifically found the president had used the Nassau funds for his personal needs.   But the record indicates that both the jury and this Court found Ardra Insurance Company, which the president controlled (his wife Jeanne was Ardra's controlling shareholder), gained a certain advantage by receiving Nassau funds for which he did not account (see Jarvis Christian Coll. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 197 F.3d 742, 747 [5th Cir.1999] ).   The “personal profit or advantage” the president received was more than just a mere “derivative benefit” (cf. In re Donald Sheldon & Co., 186 B.R. 364, 369 [S.D.N.Y.1995] ).

Federal Ins. Co. v. Kozlowski, 18 A.D.3d 33, 792 N.Y.S.2d 397 [2005], on which plaintiff relies, does not warrant a different conclusion.   There, unlike the present case, the allegations against the director in the underlying actions did not solely and entirely fall within the personal profit exclusion (id. at 41, 792 N.Y.S.2d at 403).

 In any event, the record reflects, at the very least, that coverage is barred pursuant to the D & O policy's “dishonesty exclusion.”   In the underlying action, we observed that the jury concluded the president had diverted Nassau's premiums to his other entities “as part of an integrated transaction designed to benefit [his] entities” (304 A.D.2d at 363, 761 N.Y.S.2d 1).   Surely, the jury's finding in this regard and its decision that the president should pay the Nassau estate millions of dollars demonstrated a determination that his actions had been intentional.   Our final adjudication established that the insureds had purposely and intentionally committed active and deliberate dishonesty, and thus placed the matter squarely within the liability exclusion of the D & O policy.

Plaintiff's reliance on In re Donald Sheldon, 186 B.R. 364, supra is misplaced.   That case involved a general verdict that the defendants violated the business judgment rule, engaging in either self-dealing, fraud or bad faith.   The court held that a finding of dishonesty was not necessary to the judgment (id. at 370).   Here, by contrast, both the jury (in its special verdict) and this Court found the DiLoretos had intentionally diverted assets to their own entities, which by definition constituted acts of dishonesty.   Moreover, the record indicates that the “loss” in this case is uninsurable under New York law (see Reliance Group Holdings v. National Union Fire Ins. Co. of Pittsburgh, Pa., 188 A.D.2d 47, 54-55, 594 N.Y.S.2d 20 [1993], lv. dismissed in part, denied in part 82 N.Y.2d 704, 601 N.Y.S.2d 578, 619 N.E.2d 656 [1993];  see also Vigilant Ins. Co. v. Credit Suisse First Boston Corp., 10 A.D.3d 528, 782 N.Y.S.2d 19 [2004] ).

 Nor is defendant obligated to reimburse plaintiff for his costs in defending Nassau's treasurer in the third-party action brought by Nassau's president.   As plaintiff has readily acknowledged, he was not obligated to advance defense costs for the treasurer, who at the time of the third-party action was an officer in plaintiff's Liquidation Bureau.   Thus, there is no indication that the treasurer was “entitled to indemnification by [Nassau]” under the D & O policy.   That it may be good public policy or business sense for the State Insurance Department to defend its employees who are former directors of insurance companies does not translate into a requirement that an insurer of a D & O policy must reimburse the Department in that instance, notwithstanding a provision in the policy that the insurer must provide coverage if the director is entitled to it.   Plaintiff's reliance on Mid-City Shopping Ctr. v. Consolidated Mut. Ins. Co., 35 A.D.2d 1053, 316 N.Y.S.2d 742 [1970] is unavailing.   The plaintiff seeking reimbursement in that case was the insured's alternate insurer, whereas here it cannot be said that either Nassau or plaintiff was, by any definition, an insurer of the treasurer.