Insurance Law, Pages 555–561

Alstrin v. St. Paul Mercury Insurance Company

United States District Court for the District of Delaware, 2002


A company went bankrupt, and its directors and officers were sued both by the estate representative which became a Chapter 11 debtor and by shareholder class actions for violations of federal securities laws. The directors and officers had an insurance policy with the defendant which purported to cover "Securities Claims," but defendant refused to pay, saying these claims were excluded.


Does the policy's exceptions exclude coverage?


  • Exclusion 4(c) excluded claims "arising out of, based upon or attributable to the committing in fact of any criminal or deliberate fraud."
    • If fraud was excluded, there would be nothing left for the securities fraud claims clause to cover. This would be especially devastating as securities claims are one of the most common claims filed against directors and officers. This would not be what the insured would expect.
  • Exclusion 4(a) excluded claims "arising out of, based upon or attributable to the gaining in fact of any profit or advantage to which an insured was not legally entitled."
    • This requires a profit that is illegal, not just a profit that is a by-product of an illegal act.
    • Here, the only alleged illegal conduct was a breach of the directors' and officers' duty of loyalty, not the profits incidentally gained therefrom.
    • Most securities claims involve someone inuring a benefit from the fraud. Again, if such an allegation were sufficient to invoke an exclusion, the broad coverage for "Securities Claims" would be rendered valueless.
  • Exclusion 4(i) excluded claims made against an insured "which [were] brought by any Insured or by the Company."
    • The policy was held by the debtor-in-possession when the lawsuit was filed, but once the estate representative was appointed, the debtor-in-possession ceased to exist. The estate representative was automatically substituted as a party in this action, but it is a separate entity, one which never held the policy. Therefore, the estate representative is not an insured and is not excluded.


These claims do not fall under the exclusions. Summary judgment for directors and officers plaintiffs.