In the Know: The Lowenstein Insurance Recovery Group’s Tip of the Month - October 2021

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A recent coverage case from Illinois is a helpful reminder to policyholders that they should not take no for an answer when insurers deny a claim based on uninsurability, restitution, disgorgement, or fraud. In fact, those claims may be covered.

In Astellas US Holdings, LLC v. Starr Indemnity & Liability Co. et al., 2021 WL 4711503 (N.D. Ill. Oct. 8. 2021), the federal court found that a D&O insurer must cover–up to its full $10 million limit–a settlement of a Department of Justice investigation into alleged False Claims Act violations. The insurer had to provide coverage even though the settlement expressly described the payment as restitution. In rejecting the insurer’s argument that the settlement was an uninsurable restitution payment, the court found that “restitution” was merely a “label” to “identify the tax-deductible portion of the settlement” under the Tax Cuts and Jobs Act of 2017 and that the insurer could not show otherwise. Therefore, the court, declining to take a “form over substance” approach, found coverage.

There are other myths that insurers try to invoke to deny coverage, which policyholders should be prepared to challenge. For example, many D&O policies exclude coverage for fraud, criminal conduct, or receipt of illegal gains only if there is a “final non-appealable adjudication,” allowing coverage for settlements and defense costs. Further, Delaware courts have relied on the final non-appealable adjudication language to reinforce the availability of coverage for claims of fraud, disgorgement, and restitution when insurers deny coverage. See, e.g., RSUI Indem. v. Murdock, (Del. Sup. 2021) (“[D]oes our State have a public policy against the insurability of losses occasioned by fraud as to vitiate parties’ freedom of contract…. [W]e hold that it does not.”).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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