This article originally appeared in Anderson Kill's Financial Services Alert (Autumn 2004).
Today’s headlines all too often detail class action lawsuits alleging “greed” and “avarice” by corporate directors who “ransack the corporate till” and “line their personal coffers as their companies flounder.” In many cases, such allegations prove to be entirely untrue. But the road to vindication can be costly. Will your D&O insurance cover the defense costs incurred in your victory? The “profit or advantage” exclusion under D&O liability policies is often used by insurance companies to deny coverage regardless of the veracity of the allegations. These provisions exclude the insurance company’s obligation to pay out proceeds when directors and officers make, in fact, any profit or advantage they were not legally entitled to. As one court portended, the “profit or advantage” exclusion is evolving into a “black hole” threatening to swallow up almost every legitimate claim of loss tendered by a corporation seeking to rely on the insurance policy and the premiums it has already paid.