Flintkote Co. v. Lloyd’s Underwriters

A federal grand jury issued an indictment charging the Flintkote Company (Flintkote) (plaintiff) and five other major gypsum producers with violating the Sherman Antitrust Act, a misdemeanor. The indictment also named corporate officials, including the chair of Flintkote’s board and its president. The officials were named as directors and officers and charged with individually conspiring to fix prices. Flintkote indemnified the officers for legal expenses incurred in defending the indictment. Massachusetts Business Corporation Law § 67 and Flintkote’s bylaws authorize such indemnification, as did New York’s Business Corporation Law (NY BCL) §§ 723, 727. Flintkote and the officers pleaded nolo contendere, were fined, and were dismissed from the case. Flintkote had director’s and officer’s insurance with Lloyd’s Underwriters (Lloyd’s) (defendant) since 1958. The New York-issued policy covered directors and officers for wrongful acts made in their corporate capacity once Flintkote indemnified the officials for damages or expenses incurred in connection with defending any action. Loss was defined to exclude fines, penalties, or other matters deemed legally uninsurable. Initially limited to civil claims, in 1967, Lloyd’s increased premiums and expanded coverage to include criminal-defense-related indemnifications. Citing public-policy concerns, Lloyd’s refused to reimburse Flintkote for its indemnification of the officials’ legal expenses; the fines were paid with corporate and individual assets, and no insurance reimbursement was sought. Flintkote sued and moved for summary judgment.