## Facts

- J. Christopher Alstrin, Melvin Pearl, Jeffrey Taylor, Bruce Taylor, and Sidney Taylor were former directors and officers of Cole Taylor Financial Group, Inc. (Cole).
- After Cole entered Chapter 11 bankruptcy, the directors and officers faced two sets of proceedings: (1) a federal securities class action tied to the purchase or sale of Cole securities, and (2) bankruptcy adversary proceedings brought by Cole’s bankruptcy estate representative alleging claims including fraudulent conveyance and breach of fiduciary duty.
- Cole carried a directors and officers (D&O) liability policy issued by St. Paul Mercury Insurance Company (St. Paul) covering “Loss arising from a Claim” against insured persons.
- The policy defined “Claim” as a civil, criminal, or administrative proceeding for monetary or non-monetary relief.
- The policy also provided coverage for a defined “Securities Claim,” including a claim alleging a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934 that alleges a “Wrongful Act” in connection with the claimant’s purchase or sale of Cole securities.
- “Wrongful Act” was broadly defined to include breaches of duty, neglect, errors, misstatements, misleading statements, omissions, or other acts by directors and officers acting in their insured capacities.
- St. Paul denied coverage based on three exclusions:
  - Exclusion 4(c): claims arising from “the committing in fact of any criminal or deliberate fraud.”
  - Exclusion 4(a): claims arising from “the gaining in fact of any profit or advantage to which an insured was not legally entitled.”
  - Exclusion 4(i): claims “brought by any Insured or by the Company.”
- The insured directors and officers filed a coverage action seeking a declaration that St. Paul owed coverage for the securities class action and the adversary proceedings, and they moved for summary judgment on the exclusions.

## Issues

1. Whether the fraud exclusion (Exclusion 4(c)) applies based solely on allegations of intentional fraud in the underlying complaints, or instead requires an actual determination that the insureds committed “criminal or deliberate fraud” “in fact.”
2. Whether the illegal profit/advantage exclusion (Exclusion 4(a)) applies based on allegations that the insureds benefited from the challenged conduct, or instead requires an actual determination that the insureds gained an illegal profit or advantage “in fact.”
3. Whether the insured-vs-insured exclusion (Exclusion 4(i)) bars coverage for adversary proceedings brought by a bankruptcy estate representative as claims “brought by” the Company or an Insured.

## Decision

- The court granted summary judgment for the insured directors and officers on the exclusion issues.
- Exclusion 4(c) did not bar coverage because “committing in fact” requires more than allegations; without an established factual determination of criminal or deliberate fraud, the exclusion was not triggered.
- Exclusion 4(a) did not bar coverage because it requires proof that an insured actually gained a profit or advantage to which the insured was not legally entitled; allegations of benefit or motive were not enough, and the exclusion targets an illegal gain itself rather than a gain alleged to be associated with wrongful conduct.
- Exclusion 4(i) did not bar coverage for the estate representative’s claims because the estate representative was not the Company or an Insured under the policy language, and the exclusion did not clearly extend to that bankruptcy fiduciary.
- The court rejected St. Paul’s proposed readings where they would leave the policy’s express Securities Claim coverage with little practical function.

## Legal Principles

- Insurance policies are read as a whole, and exclusions are construed narrowly and in a way that does not nullify specific grants of coverage.
- D&O exclusions using “in fact” language (for fraud or illegal profit) generally require a factual determination of the excluded conduct, not merely allegations in a complaint.
- A fraud exclusion drafted to require fraud “in fact” is not triggered at the pleading stage when the underlying action has not established criminal or deliberate fraud.
- An illegal profit/advantage exclusion requiring a gain “in fact” applies when an insured is shown to have obtained an illegal profit or advantage, not when a claimant merely alleges the insured benefited from the alleged wrongdoing.
- An insured-vs-insured exclusion aimed at suits “brought by” the Company or an Insured will not be extended to a bankruptcy estate representative absent clear policy language identifying such fiduciaries as excluded claimants.

## Conclusion

The District of Delaware held that St. Paul could not deny D&O coverage for the underlying securities class action and the bankruptcy estate representative’s adversary proceedings by relying on fraud, illegal-profit, and insured-vs-insured exclusions, because the “in fact” exclusions required an actual determination of fraud or illegal gain and the estate representative was not “the Company” or an “Insured” under the policy’s terms.


Alstrin v. St. Paul Mercury Insurance Company, 179 F. Supp. 2d 376 (2002)