A Short Primer On The Personal Profit Exclusion
By Eric Caugh and Elizabeth Kniffen
Published in Insurance Law360
Many liability insurance policies — including directors and officers (D&O), errors and
omissions (E&O) and professional liability policies — contain exclusions that bar
coverage for claims “based on or attributable to an insured gaining in fact a personal
profit or advantage to which the insured is not legally entitled.”
The purpose of these so-called personal profit or illegal profit exclusions is to prevent an
insured from reaping a windfall by receiving insurance coverage for ill-gotten gains that
the insured profited from and is forced to disgorge.
While the intent of the personal profit exclusion is clear, its application is not as
straightforward. This article provides a brief overview of the main coverage issues that
may arise when the personal profit exclusion comes into play and identifies the key
questions that should be addressed when analyzing the applicability of the personal profit
exclusion.
Who Gained the Profit and Who is Seeking Coverage?
The first questions to address when analyzing whether the personal profit exclusion
applies are “who gained the profit?” and “who is seeking coverage under the policy?”
The answers to these questions are critical to determining whether the personal profit
exclusion applies, especially where the complaint alleges that one insured gained an
illegal profit, but a separate insured is seeking coverage under the policy.
As an initial matter, the party alleged to have gained an illegal profit must be an insured.
If the underlying claim does not allege that an illegal profit was gained by an insured,
then the exclusion does not apply.[1]
In the event there are multiple insureds, but not all insureds received an illegal profit,
coverage is not necessarily excluded as to all insureds. The result will depend on the
specific language of the exclusion.
Some versions of the personal profit exclusion apply only where “the insured” against
whom the claim is made is also “the insured” who allegedly gained a profit or advantage
to which that insured was not legally entitled. Where this language is used, the exclusion
applies to bar coverage only for claims against the specific insured who allegedly gained
the illegal profit, i.e., where the insured seeking coverage is also the one that allegedly
gained an illegal profit.[2]
