Please credit who needs to be Credited. Coordinate Other Exclusions with the "Personal Profit" Exclusion

We've been advocating for years that policyholders should attempt to negotiate "final adjudication" or similar wording in the "personal profit" exclusion of a D&O policy. Such wording would require a final judgment on the merits that the insured did, in fact, receive illegal remuneration. This language would prevent the insurer from denying coverage for defense costs based solely on the allegations of the complaint.

But exclusions apply seriatim (a legal term meaning separately in successive order). So even if a claim survives the application of one exclusion, it could still be felled by another exclusion. In effect, the language of other pertinent exclusions must be coordinated with the wording of the "personal profit" exclusion to fully preserve coverage for defense costs, as demonstrated by a recent Eighth Circuit case.

In Wintermute v. Kansas Bankers Surety Co., No. 09-2806, 2011 U.S. App. LEXIS 174 (8th Cir., Jan. 6, 2011), a director of an Arkansas bank was indicted by a federal grand jury. The first two counts alleged that she made false statements to banking regulators in the paperwork she filed to acquire the bank. The other counts alleged that she committed various criminal acts while she was a director and during the D&O policy period. She was convicted on the first two counts but acquitted on the others.

Because the first two counts involved conduct before she was a director (i.e., while she was in the process of acquiring the bank), she conceded that there was no coverage under the D&O policy for the cost of defending those counts. However, she sought a partial recovery from the D&O insurer for the costs to successfully defend the other counts involving her conduct during her term as a director. The D&O insurer denied her claim, asserting that the allegations in the indictment alone were sufficient to trigger the "personal profit" and "dishonesty" exclusions.

The appellate court disagreed. The "personal profit" exclusion stated that the D&O insurer shall not be liable for a claim made against a director "based upon or attributable to the Director ... gaining in fact any personal profit or advantage to which [she was] not legally entitled." [Emphasis added.] While broader than "final adjudication" wording, the court held that the "gaining in fact" language required (1) a final decision on the merits in either the underlying case or a separate coverage case, (2) an admission by the insured, or (3) "at least some evidentiary proof that the insured reaped an illegal profit or gain." Therefore, the D&O insurer could not apply the "personal profit" exclusion by relying solely on the allegations in the indictment.

The "dishonesty" exclusion stated that the insurer shall not provide any defense in connection with any claim against a director "brought about or contributed to by the dishonesty of the Directors.... This exclusion shall not apply to any protection provided for any Director ... under the terms of this policy who was not involved in the dishonest acts." [Emphasis added.] The court read the "severability" language in the last sentence of the "dishonesty" exclusion as serving the same purpose as the "in fact" language contained in the "personal profit" exclusion. That is:

The last sentence ... makes the dishonesty exclusion inapplicable if the specific director was not actually involved in the dishonest acts. Thus, it is not enough that the criminal indictment charged [the director] with committing fraud. Material fact disputes exist concerning whether [she] "was involved in the dishonest acts" alleged, particularly in light of her acquittal on those counts.

If it weren't for the "severability" language in the "dishonesty" exclusion, the director might have lost the benefit of the "in fact" language of the "personal profit" exclusion. Heed her victory. Check the other exclusions in your D&O policy to make sure there is nothing in them that contradicts the favorable wording you (hopefully) have negotiated.