## Facts

- A federal grand jury indicted The Flintkote Company (Flintkote) and five other major gypsum producers for a misdemeanor violation of the Sherman Antitrust Act.
- The indictment also named Flintkote corporate officials, including its board chair and president, charging them (in their roles as directors and officers) with conspiring to fix prices.
- Flintkote paid and indemnified the officials’ legal fees and other defense expenses incurred in responding to the criminal prosecution.
- Flintkote relied on corporate authority to indemnify, including Massachusetts Business Corporation Law § 67, Flintkote’s bylaws, and New York Business Corporation Law §§ 723 and 727.
- Flintkote had carried directors’ and officers’ (D&O) insurance with Lloyd’s Underwriters (Lloyd’s) since 1958 under a policy issued in New York.
- The policy covered “loss” arising from directors’ and officers’ “wrongful acts” committed in their corporate capacity, and it responded when Flintkote indemnified the officials for damages or expenses incurred in defending actions.
- “Loss” was defined to exclude “fines, penalties, or other matters deemed uninsurable by law.”
- The policy originally applied to civil matters, but in 1967 Lloyd’s increased the premium and expanded the coverage to include indemnified defense expenses in criminal proceedings.
- Flintkote and the officials later pleaded *nolo contendere*; fines were imposed and paid using corporate and individual funds.
- Flintkote did not seek insurance reimbursement for any fines or penalties, only for the defense costs it had indemnified.
- Lloyd’s refused to reimburse Flintkote for those defense costs, asserting that insuring criminal antitrust defense expenses was contrary to public policy.
- Flintkote sued Lloyd’s and moved for summary judgment seeking reimbursement of the defense expenses.

## Issues

1. Whether a D&O insurer must reimburse a corporation for indemnified criminal defense expenses under a policy that expressly covers such expenses but excludes fines and penalties.
2. Whether New York public policy bars insurance coverage for directors’ and officers’ criminal antitrust defense costs where the insured seeks no payment of criminal fines or penalties.

## Decision

- The New York Supreme Court granted Flintkote’s motion for summary judgment.
- The court held Lloyd’s was obligated under the D&O policy (as amended) to reimburse Flintkote for the directors’ and officers’ criminal defense expenses that Flintkote lawfully indemnified.
- The court rejected Lloyd’s public-policy defense as a basis to deny payment of defense costs where the policy excluded fines and penalties and none were sought.

## Legal Principles

- A policy provision excluding criminal fines and penalties does not, by itself, exclude attorneys’ fees and other defense expenses incurred in responding to a criminal prosecution.
- Public policy that bars indemnification of criminal punishment (such as fines and penalties) does not necessarily bar coverage for the cost of defending against criminal charges, particularly where the insurer expressly agreed to cover criminal-defense-related expenses.
- When an insurer accepts increased premiums to extend D&O coverage to criminal proceedings, it may not avoid that bargained-for coverage by invoking a general public-policy objection, absent a specific exclusion that applies to the claimed defense expenses.
- Corporate-indemnification statutes and corporate bylaws authorizing indemnification of directors’ and officers’ defense expenses support treating a company’s indemnification payments as potentially insurable “loss,” subject to exclusions for uninsurable items (such as fines and penalties).

## Conclusion

The court required Lloyd’s to reimburse Flintkote for the criminal defense expenses Flintkote paid to indemnify its directors and officers because the D&O policy, as expanded in 1967, covered such indemnified defense costs, and New York public policy against insuring criminal punishment did not bar payment of defense expenses when fines and penalties were excluded and not claimed.


Flintkote Co. v. Lloyd's Underwriters, 1976 WL 16591 (1976)