In Directors and Officers insurance it is well accepted that the “final adjudication” standard for so-called conduct exclusions trumps the “in fact” standard every time. Given a recent 
court decision, that dogma may no longer carry the same weight but it is still, with some modification, the preferred policy language.
Conduct exclusions are typically of two types, criminal or fraudulent acts and personal profit, remuneration or advantage (and not always confined to financial advantage) to which the Insured is not entitled.
Most standard policies make an exception to these exclusions to the extent that such conduct is determined “in fact” to have occurred or that a “final adjudication” has determined that such conduct has taken place. Other policies will split the standard, applying “in fact” to personal profit and “final adjudication” to criminal acts. Still other policies (constructed in multiple sections covering Directors and Officers, Employment Practices and Fiduciary Liability) apply different standards to different coverage parts. It is important then to determine what’s what and where.
Dispensing with the quotations around these terms, the in fact standard was generally assumed to mean that the insurance company would evaluate the available evidence and make the determination of whether the conduct alleged in fact had taken place. If so, and at that point, all coverage (primarily but not exclusively defense) would be withdrawn. This made sense to the insurance company as they were then able to control the provision of coverage without relying on the more costly and time consuming process of a court's final adjudication on the merits of the underlying case.
In Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, Case No. 10-20069, decided on March 15, 2010, the Fifth Circuit declared that “absent language unambiguously pointing to the (insurance company) as the decision-maker, the policy language“ determined….”in fact” necessitates a “judicial act” before the insurance company can rely on the exclusion.
Although the case cited involved money-laundering allegations and either a public or private company D&O policy form, the same conduct exclusion language appears in not-for-profit D&O forms as well.
Of note is the fact that the Pendergest-Holt court did not conclude that this judicial determination would occur in the underlying (non coverage) action but in a separate contemporaneous coverage litigation.
All of that said, the policy language recommendation for conduct exclusions remains that the “in fact” standard is less useful (and more legally contentious) than the “final adjudication” standard. We would now add, as others have, that the final adjudication take place in the underlying action and that the adjudication be not merely final but final and non-appealable. This language should modify the conduct exclusions in separate D&O, EPL and Fiduciary polices or in all coverage parts of a management liability policy.
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