A five-paragraph opinion by the New York Appellate Division suggests the potentially devastating consequences of ignoring the fine print of Directors & Officers Liability insurance policies. In Associated Community Bancorp., Inc., et al. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op 04697 (App. Div., First Dept.), the court held that a bank caught up in the Madoff debacle had no coverage, not even for defense costs, for investor claims.

The court devoted one paragraph to each of the four exclusions which it found eliminated coverage for the investors’ claims. Three of those exclusions are fairly unique to Bankers Professional Liability Insurance Policies and are not found in most D&O policies. However, the Court’s final ground for denying coverage was the policy’s “Personal Profit and Advantage Exclusion” (often called the Profit/Advantage Exclusion).

A form of the Profit/Advantage Exclusion is found in most D&O policies, but the language can vary greatly. In the language of the exclusion in the Professional Liability policy before the Court, the exclusion eliminated coverage for loss “based upon, arising out of, or attributable to [the] Insured gaining in fact any personal profit, remuneration or financial advantage to which such Insured was not legally entitled.” (Emphasis added.) Construing this language, the Court held:

The investors’ allegation that plaintiff Westport National Bank used incoming funds to pay its own fees and to sustain its custodial business and continue to generate its fees implicates a “profit” and a “financial advantage to which [Westport] was not entitled” (see Plainview Milk Prods. Coop. v. Westport Ins. Corp., 182 F Supp 2d 852, 855 [D Minn 2001]). Nor is the exclusion inapplicable because the insured is a corporate “person” (id).

One would assume that the proviso that the advantage or profit must be gained “in fact” requires some finding, or at least a presumption, that the excluded conduct was not simply alleged, but actually (“in fact”) occurred. The Court found, however, that the mere allegations by the investors that the insured was motivated by a profit or advantage to which it was not entitled triggered the exclusion. 

This same “Profit/Advantage” Exclusion with an “in fact” trigger can be found in some D&O policies currently sold to public or private corporations. However, the more typical – and more favorable – version of the exclusion limits its application to situations where there has been a “final adjudication” of the excluded conduct. With such a trigger the insured is guaranteed access to the policy proceeds for defense of any claims, no matter how heinous the allegations, unless and until the matter is concluded unfavorably on that point.

Because the court found three other grounds for denying coverage, a more thoughtfully drafted Profit and Advantage Exclusion would not have made a difference here. It could make a critical difference, however, when it is the only exclusion standing between the insured and the availability of policy funds to defend a claim.