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June 15, 2016

Legal Update
William L. Boesch, Jessica H. Park

Opportunity for profit in failed children’s book development deal may bar coverage, Appeals Court says

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Insurance coverage for company directors and officers is typically limited by an exclusion for cases in which the insured executive gained a personal profit. In a recent case, Winbrook Communications Services, Inc. v. United States Liability Insurance Company, 89 Mass. App. Ct. 550 (2016), the Massachusetts Appeals Court held that this exclusion can apply and bar coverage even where the executive merely anticipates a profit that never actually materializes.

Two companies, Winbrook and DSG, discussed collaborating on a series of children’s books, for which DSG was to arrange and provide financing. DSG’s executive allegedly misrepresented DSG’s financial condition and funding prospects. Winbrook began work on the project, and incurred substantial costs. The project soon failed, however, and neither party obtained any profit. Winbrook sued to recoup its costs. DSG’s D&O insurer refused coverage, and DSG and its executive defaulted. Winbrook sued to recover under the D&O policy.

The personal-profit exclusion said that the policy did not cover claims involving the insured’s “gaining in fact any profit, benefit, remuneration or advantage to which such Insured was not legally entitled.” The insurer argued that the book project was an “advantage”—that is, a business opportunity—which DSG and the executive “gained in fact” even though they never profited. The Appeals Court agreed that a business opportunity could trigger the exclusion, rejecting Winbrook’s argument that the exclusion must be limited to situations involving actual profit, and holding that if a business opportunity was sufficiently concrete and substantial, it could represent an “advantage” within the scope of the exclusion. The court remanded the case for further development of the evidence as to exactly what opportunity DSG and its executive may have faced.