CGL policies are the foundation of most commercial insured’s liability coverage. But in addition to CGL coverage, the prudent insured will also buy specialized liability coverage depending on its exposure. These coverages may include professional errors and omissions, management protection and wrongful acts, employment decisions, or directors and officers liability. These specialized liability forms often exclude “personal profit to which the insured is not legally entitled” (or similar language). As far as we can tell, few courts in the far west (except California) have construed personal profits exclusions. In March of this year, however, Oregon’s federal court (the Honorable Michael J. McShane) held a personal profit exclusion in a CPA’s professional liability policy relieved the E&O insurer from its duty to defend or indemnify the insured.
In Navigators Ins. Co. v. Hamlin, Sunny Hamlin sought the insured’s accounting expertise when she and her husband of 30 years divorced. After the dissolution concluded, the insured and Hamlin remained friends, and the insured continued to provide Hamlin with tax advice. She then sought investment advice from the insured asking if she could make more money by investing with him. Eventually Hamlin loaned $660,000 to the insured, and the insured issued six promissory notes to Hamlin. The insured told Hamlin he invested her $660,000 in short term loans to local businesses. But the insured never loaned the money to anyone. The insured eventually defaulted on the notes he issued to Hamlin. She sued the insured for breach of contract and fiduciary duty. Shortly after being deposed in Hamlin’s suit, the insured committed suicide.
After Hamlin sued the insured, the insurer filed a coverage action in Oregon’s federal court asking the court to declare it had no duty to defend or indemnify against Hamlin’s suit. The insured argued the policy should cover the insured acting in a fiduciary capacity as an investment adviser because the policy covered the insured’s liability for providing investment advice. The court rejected this argument. The court reasoned that, although the policy may cover liability for providing investment advice, it also stated selling “securities, insurance products, or other investment products” was not included within investment advice liability coverage. Relying on this language, the court concluded that the insured selling promissory notes to Hamlin was selling “securities … or other investment products,” and therefore not covered as investment advice.
Turning to the personal profit exclusion, it precluded coverage for gaining personal profit to which the insured is not legally entitled. When the insured defaulted on Hamlin’s $660,000 loans, the court reasoned he was not legally entitled to the $660,000 Hamlin loaned to him. Therefore the insurer had no duty to defend or indemnify.
As you might imagine, there’s always more to the story than a court dispassionately applying an exclusion and holding no duty to defend or indemnify exists. Courts appear to vary in how broadly they interpret personal profits exclusions. Some courts limit the exclusion to cases in which the insured is alleged to have engaged in theft, insider trading, or similar conduct. Limiting the exclusion like this narrows its reach, and, in our view, reads language into the exclusion which isn’t there. Rather than engaging in linguistic gymnastics some courts have taken in holding the exclusion is narrowly limited to cases in which the insured is alleged to have engaged in what amounts to criminal conduct, the court in Hamlin simply applied the facts to the language.
The Oregon federal court, while compassionately noting the case’s “very sad circumstances” and “the human element underlying any cause of action,” did what courts are supposed to do. It interpreted the language before it without reading requirements into the exclusion that aren’t there.
The insured appealed this decision to the Ninth Circuit Court of Appeals. Hopefully the Court of Appeals will affirm Judge McShane’s decision.
