The law does not require that the transactions be based on actual use or misuse of “inside information,” only that the transactions resulting in profits took place during the time limit. Any profits that have been realized within the meaning of the Act must be paid back to the corporation.

The language in the exclusion has changed little over the last 25-30 years, as evidenced by comparing the wording of the 1960s Sturge Syndicate forms to a more recent example from the 1990s.

Underwriters shall not be liable to make any payment in connection with any claim made against the Assureds:-

(d) for an accounting of profits in fact made from the purchase or sale by the Assureds of securities of the Company within the meaning of Section 16 (b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law;

Lloyd's-Sturge Syndicate Form ALS (D5) 1st February, 1967 (amended 1st September, 1967)

The Company shall not be liable to make any payment in connection with any Claim made against the Directors or Officers:

C.  PROFITS FROM CORPORATION'S STOCK—for an accounting of profits in fact made from the purchase or sale by the INSUREDS of securities of the COMPANY within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law;

ACE Ins. Co. ACE 02 (5/96)

Although the language in the previous examples is nearly identical, other D&O policies may contain somewhat different language. Some policies make no specific reference to Section 16(b); rather, the entire Act is referenced. For large corporations (especially those engaged in public financing and stock offerings) it may be difficult to envision situations in which directors and officers would not be subject to the sweeping regulations contained in the entire Act and contemplated by the exclusion.

Some underwriters broaden the exclusion to include loss arising out of the Securities Act of 1933 and any state “blue sky” laws, which are a class of very broad regulations dealing with the sale and registration for sale of the corporation's securities. Such laws impose personal liability upon directors and officers for such acts as material misrepresentations or omissions in the corporation's registration statements. Also, some insurers expand the wording to include allegations of violations of these acts, which presumably would preclude coverage for any expenses incurred in a successful defense. A few insurers no longer include the 16(b) exclusion in their policy forms.

While some might argue that the personal-profits exclusion also may apply to short-swing-profit claims, the 16(b) exclusion is found in a large percentage of D&O policy forms. Because 16(b) and personal-profits exclusions were separate exclusions in early policy forms, it would appear that underwriters had contemplated the 16(b) exclusion as something different than the personal-profits exclusion. The question of whether 16(b) exclusions are limiting or only redundant and ambiguous is perhaps better answered by the courts. See Personal Profit and Return of Remuneration.

Obviously, it is preferable to have a policy without a 16(b) exclusion. Next best would be an exclusion that applies only to the individual-liability-coverage section, which could preserve coverage for the corporation when it indemnifies the individual insureds for defense or other expenses. Another desirable feature to limit the effect of the 16(b) exclusion would be for the severability or nonimputation provision to apply. The applicability of the severability or nonimputation provision to the 16(b) exclusion is a feature of many current D&O policy forms.