Appellate decision dismissing accounting firm’s $16m coverage claim

In one of the nation’s first appellate decisions on point, the Appellate Court of Illinois (First Judicial District), applying New York law, has affirmed that payments a policyholder makes to the federal government to resolve criminal charges pursuant to a pretrial diversion agreement are uninsurable as a matter of public policy.   Wilson Elser insurance coverage partners Thomas W. Hyland, Michael J. Case and Joseph L. Francoeur advanced the winning argument. 

 

The decision, in BDO Seidman, LLP v. Peter Harris et al., No. 1-06-2899 (Ill. App.First Jud. Dist.), arose from an accounting firm’s claim for coverage under professional liability insurance policies issued by certain Underwriters at Lloyds, London (“Underwriters”).  The claim included a demand for reimbursement of a $16 million payment the accountants had made to the federal government under a “pretrial diversion agreement.”  Under that agreement, the accountants agreed to make a cash payment and satisfactorily complete probation.  In turn, the government agreed to defer criminal prosecution of the accountants for their role in misleading federal officials regarding criminal fraud committed by one of the accounting firm’s clients. 

 

Underwriters denied any obligation to reimburse the $16 million payment, on grounds that public policy forbids insurance of criminal penalties or payments resulting from criminal conduct.   The accountants sued Underwriters in Illinois Superior Court, seeking a declaration of coverage.  Applying New York law, the trial court agreed with Underwriters’ coverage denial and dismissed the accountants’ claim for coverage of the $16 million pretrial diversion payment.

 

On appeal, the Appellate Court of Illinois (First District) affirmed the trial court dismissal.   The appellate court held – as a matter of New York public policy – that insurance coverage is not available for penalties or payments resulting from admitted criminal conduct.

 
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