In a recent decision, the United States District Court for the District of Minnesota held that insurers could not use the so-called restitution/disgorgement defense to avoid covering amounts that their insured bank agreed to reimburse to its customers as part of a settlement of claims alleging excessive overdraft fees in U.S. Bank National Association et al. v. Indian Harbor Insurance Company. U.S. Bank is the most recent in a number of recent decisions that have curtailed insurers’ use of the restitution/disgorgement defense. In this Alert, we discuss the U.S. Bank decision following a brief overview of the restitution/disgorgement defense.
The Restitution/Disgorgement Defense -
By way of background, insurers frequently rely on the restitution/disgorgement defense to deny coverage for a wide variety of otherwise-covered claims under directors and officers (D&O) and professional liability insurance policies, among others. The defense is based on the theory that the policies purportedly do not cover judgments or settlements comprising relief (or even, in some cases, defense costs) that may be characterized as “restitutionary” in nature or that requires an insured to “disgorge” sums of money. Insurers asserting the defense point to language typically contained in D&O and professional liability policies that excludes matters that are “uninsurable” from the definition of a “loss” or “damages.” Insurers may also assert that where the insured returns sums of money that it allegedly improperly obtained, the insured has not suffered an economic loss. The decision perhaps most often cited by insurers in support of the restitution/disgorgement defense is Level 3 Communications, Inc. v. Federal Insurance Co., in which the Seventh Circuit held that a D&O policy did not cover a settlement of shareholder claims alleging that the plaintiffs had sold shares in their corporation to the insured “because of fraudulent representations that [the insured] had made.” Although the Court acknowledged that the relief sought (the difference between the value of the stock at the time of trial and the price the plaintiffs had received for the stock) was “standard damages relief in a securities-fraud case,” the Court found as a matter of law that the settlement at issue was not covered because “a ‘loss’ within the meaning of an insurance contract does not include the restoration of an ill-gotten gain.” The Level 3 Court reasoned that “[a]n insured incurs no loss within the meaning of the insurance contract by being compelled to return property that it had stolen, even if a more polite word than ‘stolen’ is used to characterize the claim for the property’s return.”
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