Intentional Acts, Final Adjudication Standards, and the Duty to Defend Under D&O Policies

by Brit Weimer

Association directors and officers often face lawsuits alleging fraud, conspiracy, or other intentional misconduct. D&O insurance policies are structured to provide defense protection at the outset of such claims, recognizing that allegations of intentional wrongdoing are frequently unproven litigation tactics. To prevent premature denial of coverage, modern D&O forms typically limit intentional-acts exclusions to situations where misconduct has been conclusively established, often through a “final adjudication” requirement. This structure ensures that insureds retain defense protection until wrongdoing is actually proven, rather than merely alleged.

The main feature of these exclusions is the standard triggering their application. An “in fact” standard gives insurers substantial latitude to invoke exclusions based on their own assessment of the record. By contrast, “final adjudication” language bars application of an exclusion unless and until a court issues a binding determination of intentional, fraudulent or willful misconduct. When policies require that adjudication occur in the underlying action, they prevent insurers from relying on collateral determinations, thereby maximizing defense protection. These standards reflect the fundamental purpose of DO insurance: to provide individual officers and directors with the benefit of a defense unless a court has affirmatively determined they acted with prohibited intent.

Colorado law reinforces these principles through its stringent duty-to-defend doctrine. Under the state’s “complaint rule,” the duty to defend is triggered by the factual allegations in the four corners of the complaint, as compared with the four corners of the policy. As the Tenth Circuit explained when applying Colorado law, “an insurer’s duty to defend an insured is triggered solely on the basis of the allegations made within the four corners of the complaint, read against the insurance policy.” Land v. Auto-Owners Insurance Co., 511 F. App’x 795, 799-800 (10th Cir. 2013) (unpublished). An insurer seeking to avoid its duty to defend an insured “bears a heavy burden,” and the insurer must defend unless it can show the allegations fall “solely and entirely within the exclusions in the insurance policy.” Id.

In Land, the complaint was framed by intentional-tort labels such as fraud and conspiracy. However, the complaint also contained detailed factual assertions that the insured committed “negligent acts, errors, omissions, or breach of duty directly related to the management of [the HOA].” Id. at 801. “Looking beyond the conclusory allegations of fraud and conspiracy,” the factual allegations of the underlying complaint did not fall “exclusively and entirely” within the within the intentional-acts exclusion. Id. So the mixed allegations of both intentional and negligent conduct preserved the duty to defend.

Taken together, Colorado law and typical D&O policy provisions strongly protect community associations facing allegations of intentional wrongdoing. In most cases, the insurer must defend unless and until intentional misconduct is definitively proven. Intentional-tort allegations alone do not eliminate the vital defense coverage.