Coverage for Restitutionary Relief Based on Disgorgement

Coverage for Restitutionary Relief Based on Disgorgement

By David A. Gauntlett*

Introduction

While many insurance policies define “Loss” to include settlements, judgments, damages, and litigation expenses, restitutionary awards for disgorgement are on occasion expressly excluded from the definition of “Loss” where it is deemed “uninsurable” under the statutes and laws of the controlling jurisdiction of the lawsuit. Where no policy provisions address this issue, jurisdictions vary on the rules that govern insurance coverage for restitutionary relief. Insurer’s argument that disgorgement claims are overbroad especially where the intuition monies secured were not obtained illegally.[1]

The “As Damages” Provision Encompasses Restitutionary Damages

In Wayne Mut. Ins. Co. v. McNabb[2], a Ohio Court of Appeals held that damage claims included “unjust enrichment” relief under a Farm Owner’s Liability policy covering equitable relief for property damage.[3] The term “restitutionary damage” encompassed “[d]amages awarded to a plaintiff when the defendant has been unjustly enriched at the plaintiff’s expense.”[4] “Damages” was a component of covered “Loss” which included “Compensatory Damages” defined as “estimated money equivalent for detriment or injury sustained.”[5] As “damages” was susceptible to different interpretations, its construction in the policyholder’s favor was compelled.

Disgorgement of Gain Is Recoverable in Many Forums

Some jurisdictions, like New York and Texas, have not precluded relief for claims of restitution and disgorgement as a matter of public policy.

Conduct that is not established to be fraudulent and/or illegal acquisition is factually distinguishable from “Loss” remedied by disgorgement of ill-gotten gains. Where property is legally obtained, “Loss” cannot be excluded as it does not fall within the concept of disgorgement or restitution for awards arising from the “wrongful acquisition” or theft of another’s property which is deemed uninsurable under the law.[6]

In William Beaumont Hosp. v. Fed. Ins. Co.,[7] the Sixth Circuit precluded application of the policy’s exclusion to “disgorgement” of monies retained by the insured hospital where “money unlawfully retained is not of the same legal character as money wrongfully acquired.”

In Pharos Capital Group, LLC v. Nutmeg Ins. Co.,[8] the Second Circuit applying New York law acknowledged Beaumont and determined that while the Plaintiff’s petition recites that the underlying claims “were based on allegations that Pharos had wrongfully received millions of dollars from another entity… [it] does not reveal whether the damages sought were restitutionary in nature” and therefore may be insurable.[9]

A Minority of Forums Bar Disgorgement of “Ill-Gotten Gain”

An early Texas decision suggested that “[r]estitutions and disgorgement are not insurable under Texas Law.”[10] where disgorgement and/or restitutionary remedies are employed property that is “stolen” or secured by “ill-gotten” methods.[11] As one Texas court stated, In re TransTexas the court explained “[a]n insured sustains no ‘loss’ when it is compelled to return property that is stolen, ‘even if a more polite word than ‘stolen’ is used to characterize the claim for the property’s return.’”[12]

Absent Policy Language Or Public Policy Statues Restitution Is Covered

Other forums, like Delaware, which represent the modern trend, proscribe relief for many conducts similar to restitution and disgorgement, but have no specific legislation governing relief for restitution and disgorgement.  

In Sycamore Partners Management, L.P. v. Endurance Am. Ins. Co.[13], a Delaware Superior court analyzed Endurance’s policy to evaluate the insurability of Sycamore’s claims for relief of the Nine West settlement which addressed fraud allegations arising from “self-dealings” by Sycamore managers. Following Sycamore’s contention, the court determined that the Nine West settlement was not an excluded “Loss” because Sycamore’s allegations for unlawful gains was not adjudge unlawful in a “final, unappealable” decision as set in the issued policy and thereby insurable. In ruling apart from public policy. The court explained:

If courts understood every statute prohibiting conduct also to preclude insurance for any remedies associated with that conduct, there would be little or nothing left to insure…In Delaware…permitting insurance of payments made to redress wrongdoing is not the same as condoning as a policy matter the wrongdoing those payments redress…Insurance companies are free to sell insurance that expressly excludes coverage for cases in which restitution or disgorgement damages or settlements are obtained. In fact, that is what the Insurers tried to do in these Policies, but they cabined the exclusion to cases in which a claimant obtained a "final, non-appealable" decision in the underlying litigation establishing that Sycamore gained personal profit or remuneration to which it was not entitled.[14]

No distinction arises rendering an award for “damages” covered based on whether restitution is based on law or equity. The issue is whether the monies were obtained in a manner that was neither wrongful or prohibited.[15] Especially, as “Insurers can easily avoid this problem by drafting policies that expressly exclude coverage for lawsuits seeking the equitable remedy of restitution” as in Sycamore.[16]

Conclusion

Broad definitions of “disgorgement” and “restitution” may improperly deprive an insured of coverage. Any other construction of the policy would unduly narrow coverage by too broadly construing the exception for “sums uninsurable under the law.”[17] Indeed, it would render the policy terms illusory.[18]

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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] Richard C. Wolf & Serona Elton, Proving Disgorgement Damages in a Copyright Infringement Case is a Three-Act Play, 84 Fla. Bar J. 26 (2010)

[2] Wayne Mut. Ins. Co. v. McNabb, 45 N.E. 3d 1081 (Ohio Ct. App. Dist. 2016)

[3] Id. at 1088

[4] Id. at 1089.

[5] Black’s Law Dictionary 416 (8th Ed. 2004); see also Webster’s New Universal Unabridged Dictionary 504 (2003).

[6] See, Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 398-401 (Del. Dist. 2002) (In light of the fact that D&O policies are intended to cover security fraud claims, disgorgement that is legally gained is covered.);

[7] William Beaumont Hosp. v. Fed. Ins. Co., 552 Fed. Appx. 494, 498-499 (6th Cir. (Ohio) 2014)

[8] Pharos Capital group, LLC v. Nutmeg Ins. Co., 999 F. Supp. 2d 947, 958 (N.D. Tex. 2014)

[9] See also, McCostis v. Home Ins. Co., 31 F. 3d 110, 112-113 (2nd Cir. (N.Y.) 1994)

[10] In re Texas Gas Corp., 597 F.3d 298 (5th Cir. (Tex.) 2010)

[11] See, John L. Corbett, Is a Settlement of a Restitution Covered If Your Policy’s Ill-Gotten Gains Exclusion Applies Only in The Event of a Final Adjudication? Barnes & Thornburg, LLP. (Jun. 11, 2018) citing U.S. Bank N.A. v. Indian Harbor Ins. Co., 68 F. Supp.3d 1044, 1052 (D. Minn. 2014) (“If allegations of unlawful activity are never determined to be true, a payment to dispose of those allegations is not restitution because restitution cn only occur if that which is being returned was wrongfully taken.”)

[12] Id. at 310 quoting Level 3 Comm., Inc. v. Fed. Ins. Co., 272 F.3d 908, 911 (7th Cir. (Ill.) 2001).

[13] Sycamore Partners Management, L.P. v. Endurance Am. Ins. Co., C.A. No. N18C-09-211 AML CCLD, 2021 Del. Super. LEXIS 182 (Feb. 26, 2021)

[14] Id. at *27-29

[15] See, e.g., Dupuis v. Utica Mut. Ins. Co., No. 250766, 2006 Mich. App. LEXIS 1449, at *35 (Ct. App. Apr. 25, 2006) (“The term "damages" in these definitions is not consistent with an interpretation that would limit it to awards for compensation only on a legal, as opposed to equitable, basis.”); Cent. Ill. Light Co. v. Home Ins. Co., 213 Ill. 2d 141, 160 (2004) (“[I]n the absence of policy language to the contrary, the language "suit seeking damages" will be construed to include suits seeking either or both compensatory damages and equitable relief.”); SnyderGeneral Corp v. Century Indem. Co., 113 F.3d 536, 538-39 (5th Cir. (Tex.) 1997 (Environmental clean-up costs based on technical distinction between legal damages and equitable relief was improper.); Farmland Indus. v. Republic Ins. Co., 941 S.W.2d 505, 509 (Mo. 1997) (“The definitions of "damages" do not distinguish between legal damages and equitable relief.”); Bausch & Lomb Inc., v. Utica Mut. Ins.Co., 625 A.2d 1021, 1032 (Md. 1993) (“Damages” in common usage means the reparation in money for a detriment or injury sustained. The reasonably prudent layperson does not cut nice distinctions between the remedies offered at law and in equity.”); New Castle County v. Hartford Acc. & Indem. Co., 933 F.2d 1162, 1168-69 (3d Cir. (Del.) 1991) (“We think that the common, everyday meaning of the word "damages" encompasses liabilities arising from both actions at law and actions in equity.”).

[16] Christopher C. French, Insurability of Claims for Restitution, 18 U. Pa. J. Bus. L. 599 (2016)

[17] Bay Electric Supply, Inc. v Travelers Lloyds Ins. Co., 61 F. Supp. 2d 611, 617, (S.D. Tex. 1999)

[18] Gallup, Inc. v. Greenwich Ins. Co., 2015 Del. Super. LEXIS 129, *35 (Newcastle Co. Sup. Ct. Feb. 25, 2015) (“[I]n drafting the language to broadly, the Court finds that virtually any aspect of Plaintiff’s business would be ‘related’ to rendering ‘professional services’ which conceivably would preclude coverage for all claims made under the policy. [citing Rob Levine & Assocs. Ltd. v. Travelers Cas. & Sur. Co. of Am., 994 F. Supp. 2d 228, *4 (D.R.I. 2014)].”)