A New York appeals court refused to allow insurers to invoke a dishonest acts exclusion to avoid a bank’s claim for the indemnity of a $200 million fine paid to regulators. The clause read “This policy shall not apply to any claim made against the insured based upon or arising out of any deliberate, dishonest, fraudulent or criminal act or omission by such insured”. But only if there is a “judgment or other final adjudication thereof adverse to such insured”.

The court held that a settlement between the financial institution and the regulator without the bank admitting liability for alleged misconduct did not qualify as a “judgment or other final adjudication” of wrongdoing as required by the exclusion.

The court relied on the fact that the regulator’s allegations were neither admitted nor denied by the financial institution and the administrative orders were the result of settlements in which the institution reserved the right to take contrary legal or factual positions in any proceedings to which the regulator was not a party.

Lesson one: Exclusions are narrowly interpreted so word them so that they embrace all the situations you wish to exclude.

The court said that the insurers could nonetheless oppose the claim on the basis of an argument that public policy disfavours covering intentional harmful conduct.

The insurer could invoke public policy against permitting insurance coverage for the penalties. The court said the contractual language of the policy may be overridden where an insured engages in conduct with the intent to cause injury.

Lesson two: The courts will sometimes override specific policy wording. But if your policy specifically excludes a certain type of loss, you may not be given the right to defend the claim on a broader common law basis that is not in the contract.

The case which can be read here has not yet been heard on the facts.