Upfront and personal: proper use of the 'personal profit' exclusion must be determined for defense coverage claims in white-collar criminal cases.

When I see insurance cases talking about getting "real" and "truly personal," I get excited. The context, of course, is corporate crime, a subject that continues to be big news. Corporate misdeeds inevitably lead to lawsuits, and ultimately, insurance coverage claims.

In 2005, this column addressed a coverage issue arising from corporate crime claims: the "personal profit exclusion." Recently, in the spring and summer of 2006, three more courts examined this interesting provision: PMI Mortgage Insurance Co. v. American International Specialty Lines, Federal Insurance Co. v. Cintas Corp, and Pereira v. National Union Fire Insurance Co. The courts--though declining to grant motions for summary judgment applying the "personal profit exclusion"--clarified the requirements of this provision and indicated that under the specified circumstances, coverage will be barred.

The personal profit exclusion typically provides that "the insurer shall not be liable to make any payment for loss in connection with a claim made against an insured: (a) arising out of, based upon or attributable to the gaining in fact of any profit or advantage to which an insured was not legally entitled...."

The exclusion concept seems reasonable. If an insured illegally takes a dollar from a company and the insured is sued for the return of the illegally-taken dollar, the insurer will not shield the insured from such suits. Why should an insured be covered for a dollar taken illegally? Seems uncontroversial, does it not?

Controversy, however, abounds. Does the term "an insured" mean "any insured," or is it limited to the insured that personally profited? Also, what is the meaning, within the exclusion, of the words "in fact?"

The question of "an insured" arises because the exclusion bars coverage for "a claim made against an insured ... arising out of ... profit to which an insured was not legally entitled." Must the insured against whom the claim is made be the same insured who took the profit? Stated differently, does one insured's illegal personal profit bar another insured's claim for coverage?

The Pereira court addressed this issue in the summary judgment context and held that it could not, at this point, "conclude as a matter of law that the language was intended to exclude coverage" to the defendants who did not profit. The court was persuaded by a policy provision stating that the wrongful act of one director shall not be imputed to a second director. This provision, the court found, "render[s] the personal profit exclusion truly personal as to each officer."

This ruling is disturbing because the policy language does not restrict the exclusion to circumstances in which the profiting insured is claiming coverage. The exclusion speaks of "an insured" taking a profit; the exclusion does not say that the insured claiming coverage took a profit. Fortunately, the court left the door open to such an ultimate finding in that the court merely denied the insurer's motion "at this stage" and the court did not find that coverage actually exists.

The words "in fact" create another issue: does the exclusion require a factual determination of personal profit, or is it sufficient to have a simple allegation of personal profit? Two recent cases, PMI Mortgage and Federal Insurance, held that mere allegations are not sufficient. The PMI Mortgage court wrote that the "phrase 'in fact' ... refers to something which is put forward as 'objectively real' or which can be 'objectively verified.'" The PMI court ultimately held that the insurers must make their showing "through proof of either evidentiary facts or a final adjudication." The courts were requiring more verification than provided in these instances, but it is not clear how much more. Importantly, neither court endorsed the conclusion that the "in fact" language limits the exclusion to circumstances involving a judicial determination.

Policyholder advocates will be pleased that policyholders avoided the entry of coverage-barring rulings in these three recent decisions. But, the decisions do not stop insurers from pursuing this defense in these and other cases. And insurers will be able to apply the exclusion and bar coverage, as soon as they make a case that is sufficiently "real" and "truly personal."

Alan S. Rutkin, a Best's Review columnist, is a partner at Rivkin Radler LLP, Uniondale, N.Y. He may be reached at [e-mail].