Virtually all D&O and E&O policies include what are often called “conduct” exclusions, which bar coverage for certain losses arising out of a determination that the policyholder acted criminally, fraudulently, dishonestly or maliciously. Unlike typical substantive D&O/E&O exclusions (bodily injury, insured vs. insured, etc.), conduct exclusions typically only take effect if and when the policyholder is judged liable for the specified type of conduct. This generally enables policyholders to retain their initial right to an insurance company–funded defense until there is a finding of wrongdoing.
The conditional nature of conduct exclusions implements two key interlocking principles of liability insurance: (1) that a policyholder should have the right to a funded defense of the allegations against him or her, no matter how egregious; but (2) that a policyholder should not be able to use insurance to deflect liability for intentionally wrongful conduct.