Opinion ID: 182335
Heading Depth: 3
Heading Rank: 1

Heading: Personal Profit Exclusion

Text: Once it is determined that there is coverage, it must be determined whether the exclusionary provisions in the policy eliminate coverage. Smith v. Farm Bureau Mut. Ins. Co. of Ark., Inc., 88 Ark. App. 22, 194 S.W.3d 212, 218 (2004). The general requirements that the insurance terms must be expressed in clear and unambiguous language apply equally to exclusions. Id. Unambiguous language controls, but if the language is found to be ambiguous, then the rules of constructionincluding that contracts are read against the insurer who prepared the policyapply. Id. at 218-19. If the policy can reasonably be construed to justify recovery, or if the policy language is susceptible to two interpretations, the court must adopt the interpretation most favorable to the insured. Id. at 219. The district court concluded that exclusion 2 and exclusion 11 each precluded coverage for Wintermute's attorney's fees related to the criminal case. Exclusion 2 provides that KBS shall not be liable for payment or defense of any claim for Loss made against a Director based upon or attributable to the Director[ ] . . . gaining in fact any personal profit or advantage to which [she was] not legally entitled. (Add. tab 1 at 15.) The district court concluded that even if the policy provided coverage, this personal profit exclusion would apply to deny coverage, rejecting Wintermute's argument that her acquittal shows that she did not gain[ ] in fact any personal profit. The pleadings against the insured, no matter how groundless, false, or fraudulent the pleadings may be, determine an insurer's duty to defend. That duty arises where there is a possibility that the injury or damage may fall within the policy coverage. Madden v. Cont'l Cas. Co., 53 Ark. App. 250, 922 S.W.2d 731, 734 (1996). The district court relied on this rule of law to conclude that it could look only at the allegations in the complaint to determine whether KBS had a duty to defend and that those allegations fell squarely within the personal profit exclusion. According to the district court, the eventual outcome of the underlying lawsuit is irrelevant if the allegations of the complaint fall within the exclusionary language. While coverage is determined based on the allegations in the complaint, we are dealing here with an exclusion issue, not with a coverage issue. See id. (addressing a fraud exclusion and concluding that questions of fact as to whether the policy exclusions actually applied precluded summary judgment). Absent absolute clarity on the face of the complaint that a particular policy exclusion applies, there exists a potential for coverage and an insurer cannot justifiably refuse to defend. Lorenzo v. Capitol Indem. Corp., 401 Ill. App.3d 616, 340 Ill.Dec. 677, 928 N.E.2d 1274, 1278 (2010) (internal marks omitted). The district court's analysis ignores the term in fact contained in the personal profit exclusion. Under Arkansas law, contracts are to be construed as a whole, and all terms of a contract should be given meaning. See Travelers Indem. Co., 764 S.W.2d at 599. Review of the exclusionary provisions of the KBS policy reveals that other exclusions apply wholesale to all allegations of a particular class. For example, the policy excludes coverage for claims  involving political contributions of any kind,  involving sexual, racial, religious, or age discrimination or harassment, or  involving allegations of racketeering activity as defined in [18 U.S.C. § 1961]. (Add. tab 1 at 15, exclusions 5-7 (emphasis added).) If the policy was intended to exclude all claims merely alleging a personal profit, it could have used a similar format as exclusions 5, 6, and 7 do and defined the exclusion as applying to a claim involving illegal personal profits. But it does not; it defines the exclusion as based upon or attributable to the Directors. . . gaining in fact any personal profit . . . to which they were not legally entitled. ( Id. at 15, exclusion 2 (emphasis added).) We believe the phrase gaining in fact must have some meaning, and relying solely on the allegations of a personal gain contained in the complaint reads that phrase out of the insurance contract. See PMI Mortg. Ins. Co. v. Am. Int'l Specialty Lines Ins. Co., No. C-02-1774, 2006 WL 825266, at -6 (N.D.Cal. Mar. 29, 2006) (unpublished) (noting that the in fact language did not appear in all the exclusions, such that the phrase had to mean something in the personal profit exclusion). The district court noted a conflict of authority over whether exclusion provisions using the term in fact require the court to look beyond the face of the complaint. The district court followed the Seventh Circuit, see Brown & LaCounte, L.L.P. v. Westport Ins. Corp., 307 F.3d 660, 663 (7th Cir.2002) (rejecting, as contrary to Wisconsin law, an interpretation of a gaining-in-fact-personal-profit exclusion that would require a defense until the allegations of personal profit were proved), which concluded that if an insurer had to await the outcome of the underlying litigation to determine whether the director in fact gained a personal profit, it would always have to defend the director, eviscerating the exclusion. The Seventh Circuit concluded that a personal gain exclusion applies to the whole class of claims, at least where the underlying complaint unequivocally and directly alleges a personal gain by the insured. Id. at 664. An opposing line of cases concludes that the term in fact must have some meaning. See PMI Mortg. Ins., 2006 WL 825266, at -6 (concluding that there must be some determination of fact before an identical personal profit exclusion could be applied in order to give effect to the plain and ordinary meaning of the term in fact, particularly where the actual illegality of the alleged gain was in dispute); St. Paul Mercury Ins. Co. v. Foster, 268 F.Supp.2d 1035, 1045-46 (C.D.Ill.2003) (relying on rules that all policy provisions should be given meaning and that interpretations rendering any part of the contract superfluous should be avoided to conclude that mere allegations of an improper personal profit were insufficient to trigger policy exclusion without further fact development). We agree with this line of cases. The term in fact means actual or real or resulting from the acts of parties rather than by operation of law. Pendergest-Holt v. Certain Underwriters at Lloyd's of London, 600 F.3d 562, 570-71 (5th Cir. 2010) (quoting Black's Law Dictionary 792 (8th ed.2004)). To give effect to its meaning, the insurer cannot deny a defense based solely on the allegations in the complaint unless the facts are uncontested. Whether an insured in fact gained a personal profit is a fact issue that must be decided by a trier of fact if the relevant evidence is disputed. Cf. TIG Specialty Ins. Co. v. Pinkmonkey.com Inc., 375 F.3d 365, 371 (5th Cir.2004) (looking at the state court jury findings that determined that a director did not actually benefit from his misrepresentations to conclude that coverage concerning a securities fraud claim brought solely against that director would not be excluded under a similar personal profit exclusion); Jarvis Christian Coll. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA., 197 F.3d 742, 747 (5th Cir.1999) (reviewing for clear error the district court's factual determination, made during a bench trial, of whether an insured actually gained a personal profit). We reject KBS's claim that looking beyond the allegations in the complaint will result in a final adjudication requirement even though the policy contains no such requirement. As noted by the Fifth Circuit, in fact language is generally read more broadly than a final adjudication clause and can be satisfied by a final decision on the merits in either the underlying case or a separate coverage case, or an admission by the insured. Pendergest-Holt, 600 F.3d at 573. Thus, while in fact language does not require a final adjudication in the underlying case, it should include at a minimum, at least some evidentiary proof that the insured reaped an illegal profit or gain. PMI Mortg. Ins. Co., 2006 WL 825266, at . Even the facts alleged in the indictment do not unequivocally assert that Wintermute illegally gained a personal profit. As related to the covered counts, the criminal indictment charged Wintermute with illegal participation, misapplication of bank funds, and bank fraud. The facts supporting the charges in the indictment related to the covered counts alleged that she and her husband failed to disclose to the Comptroller of the Currency (OCC) their financial relationship with Sinclair Management Services and with Stevens Financial Group and used their positions as bank directors to cause SNB to buy several million dollars worth of loans from Stevens Financial Group without disclosing their interest in the loans to the other directors and in violation of federal lending limits. The indictment further charged that the purchase of Wintermute's home was funded by Stevens Financial Group after Clarence Stevens obtained funds from SNB. It also alleged that Stevens Financial Group paid Wintermute more than $300,000 over a one-year period. Missing from the facts stated in the indictment is an allegation that Wintermute received a personal gain to which she was not legally entitled. See Alstrin v. St. Paul Mercury Ins. Co., 179 F.Supp.2d 376, 400-01 (D.Del.2002) (concluding that securities fraud allegations did not fit within a personal gain exclusion where at most the allegations alleged a gain as a side benefit but did not allege that the gain was itself illegal, focusing on the elements of the underlying cause of action). The Seventh Circuit in Brown distinguished cases involving allegations of breaches of fiduciary duty where the dispute concerned the illegality of the actions taken or profits received. Brown, 307 F.3d at 664; see also Am. Chem. Soc'y v. Leadscope, Inc., No. 04AP-305, 2005 WL 1220746, at  (Ohio Ct.App. May 24, 2005) (distinguishing Brown and noting that there remains a question of whether any conversion, in fact, took place. Only if a conversion actually took place would the profits derived from appellees' patent be deemed illegal.). By contrast, Brown involved direct and unequivocal allegations that Brown reaped an illegal profit by billing a client for legal services provided under an illegal contract. In Homebank of Ark. v. Kan. Bankers Sur. Co., No. 4:06cv1670, 2008 WL 2704670 (E.D.Ark. July 7, 2008), the district court denied summary judgment to KBS on its claim that it did not have a duty to defend a bank president against a claim of fraudulent inducement resulting in an improper benefit to the bank president, where KBS relied on the same personal profit exclusion at issue in this case. The court noted that the duty to defend arose from the possibility of coverage. Id. at . In later denying KBS's motion for reconsideration, the court further explained its rationale that KBS had a duty to defend the bank president against the fraudulent inducement and related claims because there was a possibility, however remote, that the to-be-established facts will show that the personal profit and dishonesty exclusions do not apply. Homebank of Ark. v. Kan. Bankers Sur. Co., No. 4:06-1670, slip op. at 3-4 & n. 2 (E.D.Ark. Aug. 28, 2008). We conclude that the Arkansas courts would follow the line of cases giving meaning to the term in fact and would require at least some evidence that the insured actually received a personal gain to which she was not legally entitled before allowing the insurer to deny a defense. See Madden, 922 S.W.2d at 734. The district court erred in granting summary judgment based on the personal profit exclusion by relying solely on the allegations in the indictment.