In Protection Strategies, Inc. v. Starr Indemnity & Liability Co., Civil Action No. 1:13-cv-00763 (E.D. Va. Apr. 23, 2014), the United States District Court for the Eastern District of Virginia granted Starr Indemnity & Liability Company’s (“Starr”) motion for summary judgment on its claim for recoupment of all funds it had advanced to Protection Strategies, Inc. (“PSI”) for its defense of an investigation by the NASA Offices of the Inspector General (“NASA OIG”). The court concluded that, in the wake of the guilty pleas by executives of PSI, the NASA OIG investigation triggered certain exclusions in PSI’s directors and officers liability insurance policy.
PSI, a global security management and consulting company that did business with NASA, purchased from Starr a form of directors and officers liability coverage that covered individuals and the company itself. In January 2012, during the coverage period, PSI received a subpoena from the NASA OIG, and a search and seizure warrant relating to PSI’s alleged violations of various false statement and fraud provisions of the U.S. Criminal Code. The NASA OIG subsequently executed a search of PSI’s headquarters. Several months later, the U.S. Attorney for the Eastern District of Virginia sent a letter to PSI indicating that it was investigating PSI for civil liability in connection with its participation in the Small Business Administration (SBA) Section 8(a) program.
PSI notified Starr of the NASA OIG investigation and demanded payment of its defense costs. Starr initially took the position that the investigation did not constitute a “claim” under the policy, which was rejected by the district court. Thereafter, Starr issued a reservation of rights letter and began reimbursing PSI for the defense costs it incurred in indemnifying its officers, specifically four executives who were the primary targets of the NASA OIG investigation. The NASA OIG investigation continued through 2012 and, in 2013, the four PSI executives entered guilty pleas, each stipulating that he knowingly and willfully defrauded the U.S. government.
PSI and Starr filed cross-motions for summary judgment. Starr contended that the guilty pleas triggered four exclusions in the policy, and that it was entitled to recoup the amounts it had advanced for the defense fees. Three of the exclusions were incorporated into the directors and officers liability coverage section of the policy, Exclusion 3(a) (“Profit Exclusion”), Exclusion 3(b) (“Fraud Exclusion”), and Exclusion 3(d) (“Prior Knowledge Exclusion”). The fourth exclusion was based on the Warranty and Representation Letter attached to the policy, wherein PSI represented that “[n]o person or entity proposed for insurance under the policy referenced above has knowledge or information of any act … which might give rise to a claim(s), suit(s) or action(s) under such proposed policy.” The letter further stated that, if any such “knowledge or information exists, then … any claim(s), suit(s) or action(s) arising from or related to such knowledge or information is excluded from coverage.”
In reviewing the evidence, the district court concluded that the policy’s exclusions applied and acted as a complete bar to coverage for the investigation of PSI and its officers. The district court found that the personal profit and fraud exclusions “unambiguously” applied, as the guilty pleas established that the executives knowingly, intentionally and improperly gained an advantage and illegal remuneration because of their fraudulent activities. The district court found that the guilty pleas also triggered the prior knowledge exclusion as the pleas showed that each of the officers had knowledge when the policy incepted of an ongoing scheme to defraud the government. The district court further found that the exclusion in the warranty letter had been triggered as based on PSI’s “material misrepresentation” that no person had knowledge of facts that might give rise to a claim. The district court concluded that, because the entirety of the defense costs advanced fell under the exclusions in the policy, Starr was entitled to recoupment.