Stein v. Axis Insurance Company

In Stein v. Axis Insurance Company, 10 Cal.App.5th 673 (March 8, 2017), the California Court of Appeal reversed the trial court's entry of judgment after issuing an order sustaining defendant Houston Casualty Company's ("HCC") demurrer to a complaint for declaratory relief and bad faith filed by Michael Stein in connection with HCC's refusal to pay for defense expenses incurred in connection with the appeal of a criminal conviction under a directors and officers liability insurance policy issued to Heart Tronics, Inc. ("Heart Tronics"). The parties' dispute arose out of a grand jury charge indicting Stein with 14 counts of mail, wire, and securities fraud; money laundering and obstruction of justice. On May 20, 2013, a jury found Stein guilty on all counts and he was sentenced to 17 years in prison and ordered to forfeit over $5 Million. Stein appealed the judgment, and in January 2017, the 11th Circuit confirmed his conviction, but vacated the sentence and remanded the matter for resentencing. Thereafter, Stein moved for panel or en banc rehearing from the 11th Circuit. The FCC also filed a civil action on December 20, 2011 against Stein and Heart Tronics alleging securities fraud and falsification of records. The FCC alleged Stein "was a de facto officer" of Heart Tronics, in that he performed policy-making functions for Heart Tronics akin to an officer. On February 18, 2015, the district court granted summary judgment to the SEC, finding no triable issue existed as to Stein's securities fraud, and ordered Stein to disgorge $5.3 Million in illegally gained profits.

After his criminal conviction, Stein tendered his appeal to HCC. HCC denied coverage on the ground that Stein was not the functional equivalent of a Heart Tronics officer. In addition, HCC took the position that the judgment entered against him in connection with the criminal proceedings constituted a final adjudication adverse to Stein eliminating its obligation to pay for the appeal of the criminal judgment. In response, Stein filed a complaint for fraud, breach of contract and bad faith against HCC. Stein argued that the definition of "claim" in the HCC policy was expanded in an amended policy issued by HCC after meeting with Stein's broker to include civil or criminal proceedings commenced by the service of a complaint or similar document, the filing of a notice of charges or formal investigative order, or the return of an indictment or information, including an appeal from...