7 Tips For Fighting Back Against The D&O Personal Profit Exclusion

Few provisions in Directors and Officers ("D&O") insurance policies have given rise to more litigation than the personal profit exclusion. For those unfamiliar, the provision generally excludes coverage for claims arising from or based upon the gaining of any personal profit, advantage or remuneration to which an insured was not legally entitled. Insurers typically allege that this exclusion applies broadly to D&O lawsuits that allege an act of wrongdoing leading, directly or incidentally, to the company receiving some profit or advantage. Compounding the issue, the personal profit exclusion, unlike other conduct-related exclusions (e.g., the "fraud exclusion"), does not require culpability or ill-motive. According to insurers' thinking, the clause excludes coverage for virtually all D&O lawsuits. Indeed, the potential reach of the personal profit exclusion seems bound only by the imaginations of creative insurers seeking to deny coverage.

Judicial Application of the Exclusion

Not surprisingly, given the amorphous language of the personal profit exclusion and its potentially broad application, the provision has given rise to substantial litigation in recent years. Some courts have been quick to apply the clause to all sorts of claims involving nearly any type of benefit allegedly obtained by an insured. Other courts have recognized that this exclusion, if applied too broadly, could swallow up the very protections intended under D&O policies.

Alstrin v. Saint Paul Mercury Insurance Company, 179 F. Supp. 2d 376 (D. Del. 2002), is the seminal case espousing a constrained view of the personal profit exclusion. Alstrin involved coverage for an underlying securities class action lawsuit alleging fraud and misrepresentations in the issuance of company stock. The court recognized that nearly all securities fraud complaints will allege "that the defendants did what they did in order to benefit themselves in some way." Id. at 400. If mere allegations of profit or benefit were sufficient to implicate the personal profit exclusion, D&O coverage for securities claims would be rendered valueless. Id. Therefore, according to the court, the personal profit exclusion applies only "[i]f an element of the [underlying] cause of action . . . requires that the insured gained a profit or advantage to which he was not legally entitled." Id. It does not apply to illegal acts that produce profit or gain to the insured as a by-product. In other words, the clause...