CUMIS Specialty Insurance Company, Inc. v. Kaufman

Background

CUMIS issued Alan Kaufman a Management & Professional Liability Policy effective from April 30, 2016, through April 30, 2017. The policy generally covered losses resulting from claims made during the policy period, and defined “loss” to include defense costs, including reasonable attorneys’ fees incurred in defending a claim and any appeals.

The policy contained two relevant exclusions. The Dishonest or Willful Acts Exclusion excluded losses related to claims based on deliberately dishonest, fraudulent, intentional, or willful misconduct, but only if a final adjudication established that the insured committed the misconduct. The Remuneration Exclusion similarly excluded claims arising from profit, unjust enrichment, remuneration, or an advantage to which the insured was not legally entitled, but only if a final adjudication established that the insured was not legally entitled to it.

A jury convicted Kaufman on March 31, 2021, of two counts of accepting a gratuity in violation of 18 U.S.C. § 215(a)(2). Judgment was entered on October 13, 2021, and Kaufman appealed to the United States Court of Appeals for the Second Circuit. The appeal remained pending when the district court decided CUMIS’s motion.

Kaufman’s counsel asked CUMIS to advance fees for the appeal. CUMIS agreed to advance the fees if Kaufman would repay amounts later determined to be excluded under the policy. CUMIS paid much of the appeal-related legal fees but rejected many invoices submitted after sentencing. CUMIS then sought declarations that the exclusions applied, that coverage would violate public policy, and that CUMIS could recover post-sentencing fees it had paid. Kaufman asserted counterclaims for anticipatory breach of contract, breach of the implied covenant of good faith and fair dealing, and a declaration that the policy covered his appeal fees.

Motion and governing law

CUMIS moved under Federal Rule of Civil Procedure 12(c) for partial judgment on the pleadings. The court applied the same standard used for a motion to dismiss for failure to state a claim, while accepting the factual allegations in Kaufman’s answer and drawing reasonable inferences in his favor because CUMIS was the moving party. The court applied New York substantive law.

Policy exclusions

The court held that Kaufman’s conviction established intentional and corrupt acceptance of gratuities in exchange for providing favorable loans and making advertising purchases. The court concluded that these acts constituted both a willful or intentional violation of law and the receipt of remuneration to which Kaufman was not legally entitled.

The court rejected Kaufman’s argument that there had been no final adjudication because his appeal was pending. Under New York law, the imposition of a sentence constitutes the final judgment against the accused, and the pending appeal does not change that finality. The court also found no meaningful distinction between the policy’s term “final adjudication” and the term “final judgment,” noting that New York cases have used those terms interchangeably.

The court rejected Kaufman’s reliance on decisions requiring insurers to cover defense costs through an appeal. Those cases did not involve New York law or policy exclusions that became effective upon a final adjudication. The court also rejected the argument that applying the exclusions would make the policy’s reference to defense costs for “any appeals” meaningless. The policy could still cover many appeals that did not involve a final adjudication of the insured’s wrongdoing or unlawful remuneration. Clear exclusions could limit otherwise general coverage.

The court further determined that the exclusions were not ambiguous and that their interpretation did not need to wait for summary judgment. Interpreting an unambiguous insurance agreement is a legal question.

Unclean-hands defense and disposition

Kaufman argued that CUMIS should not be allowed to recover post-sentencing defense costs because CUMIS had disputed many invoices in bad faith. The court held that the equitable defense of unclean hands was unavailable because CUMIS’s action sought to determine amounts owed under the insurance policy and the fee-advancement agreement, making it an action at law rather than in equity. The court alternatively held that Kaufman had not plausibly alleged immoral, unconscionable, or bad-faith conduct by CUMIS.

Judge Denise Cote granted CUMIS’s April 14 motion. The court ruled that CUMIS was not obligated to pay Kaufman’s defense costs on appeal and was entitled to recoup post-sentencing defense costs it had already paid.