Court Finds Coverage For Settlement Of Restitution Claim

Court Finds Coverage For Settlement Of Restitution Claim

Insurers often take the position that indemnification for claims for “restitution” are barred by public policy, and contend they have no obligation to reimburse a settlement of such claims. They often take this position even if the policy itself states that coverage can only be denied if there is a “final adjudication” the insured has obtained a personal profit to which it was not entitled.

This position is based largely on Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908 (7th Cir. 2001), [enhanced version available to lexis.com subscribers]. In that case, Judge Posner ruled that indemnification of restitution was barred by public policy, and the public policy prohibition applied regardless of whether indemnification is for a judgment or settlement. Level 3, however, did not address the “Personal Profit” exclusion. We have argued that Level 3 does not apply to settlements, particularly where there is a “Personal Profit” exclusion which is expressly limited to cases in which liability is determined by a “final adjudication.” Recently, a Federal District Court in Minnesota has reached exactly this conclusion. See U.S. Bank Nat’l. Assoc. v. Indian Harbor Insurance Company , U. S. District Court. Dist. of Minn., Case No.: 12-CV-3175 (July 3,2014), [enhanced version available to lexis.com subscribers]. In U.S. Bank, the Court looked at Delaware law, and determined there was no Delaware public policy against indemnification for restitution. Moreover, the Court held that the “Ill-Gotten Gains” exclusion further supported coverage.

As the Court explained:

[T]he policies exclude from coverage restitution resulting from a final adjudication and by implication include within coverage restitution stemming from a settlement. The Ill-Gotten Gains Provision excludes from coverage money to which U.S.Bank “is not legally entitled” only “as determined by a final adjudication in the underlying action.” This provision shows not merely that the parties contemplated the possibility of coverage for restitution, but that they agreed coverage would exist unless the restitution was imposed by a final adjudication. When an underlying action alleging ill-gotten gains settles before trial, there is no final adjudication in that action.

(Slip Op. at p.6). The Court recognized that Level 3 found no coverage for a settlement, but distinguished it on the ground that it did not involve an exclusion with final adjudication wording. In the absence of clear Delaware law that indemnification of a settlement was against public policy, this policy provision would be applied according to its terms.

This is an important point, and should apply even in states where indemnification of restitution is barred by public policy. The policy against indemnification of restitution should not apply to bar indemnity of cases involving allegations of improper gain, particularly when the policy language expressly provides coverage in the absence of a final adjudication.

    By John Green, Partner, Farella Braun + Martel LLP

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