## Facts

- Lee N. Mortenson became president of Opelika Manufacturing Company in 1984 while it was in financial distress.
- Opelika had failed to remit over $100,000 in federal payroll taxes before Mortenson assumed office; he learned of the default months later and took no meaningful preventive steps.
- Opelika again failed to pay payroll taxes in late 1984 and early 1985 while paying other creditors.
- The IRS proposed assessing Mortenson personally under 26 U.S.C. § 6672(a), which imposes liability “equal to the total amount of the tax” not paid on a responsible person who “willfully” fails to collect, account for, or pay over payroll taxes.
- The government pursued collection, and Mortenson ultimately settled and paid $900,000.
- Opelika had a directors’ and officers’ liability policy covering certain “losses” from “wrongful acts,” but the definition of “loss” excluded “fines or penalties imposed by law” (and other uninsurable matters).
- Mortenson sought indemnification for the settlement payment; the insurer denied coverage based on the “fines or penalties” exclusion.

## Issues

1. Whether a liability assessed under 26 U.S.C. § 6672(a) is a “penalty imposed by law” within the meaning of the D&O policy’s exclusion, barring coverage for Mortenson’s settlement payment.
2. Whether Illinois public policy independently disfavors insurance coverage for § 6672 liabilities arising from willful nonpayment of trust-fund taxes.

## Decision

- The Seventh Circuit affirmed summary judgment for the insurer.
- The court held that § 6672(a) liability is a “penalty imposed by law” and therefore falls within the policy’s unambiguous exclusion.
- The court rejected Mortenson’s argument that the assessment was merely remedial because the government often limits total collection to the amount of unpaid taxes.
- The court also rejected the claim that “penalty” should be limited to deliberate wrongdoing; “willful” under § 6672 entails voluntary, conscious, and intentional conduct.

## Legal Principles

- Under Illinois law, insurance policy terms are construed according to their plain, ordinary meaning, and unambiguous exclusions are enforced as written.
- When a statute denominates an exaction a “penalty” and the exaction serves deterrent and punitive purposes, an insurance exclusion for “fines or penalties imposed by law” applies absent contrary policy language.
- Administrative enforcement practices that may limit total governmental recovery do not change the legal character of a statutorily defined penalty.
- Public policy concerns against insuring penalties for willful violations—especially those intended to ensure prompt remittance of trust-fund taxes—support enforcing penalty exclusions in D&O policies.

## Conclusion

The court held that Mortenson’s § 6672 payroll-tax liability was a statutory penalty excluded from the D&O policy’s definition of covered loss, so the insurer had no duty to indemnify his $900,000 settlement payment.


Mortenson v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 249 F.3d 667 (7th Cir. 2001)