Insurance Coverage for Restitution and Disgorgement—A Case Study

 

Restitution and disgorgement are old remedies that involve giving back something that was wrongfully taken.  Traditionally, these remedies were sought in fraud cases.  Today, along with fraud cases, restitution and disgorgement are often sought as remedies by government agencies, particularly in consumer protection actions.  In fact, in many government actions, they may be the sole monetary remedies sought from a company.  As a result, finding insurance coverage for restitution and disgorgement is very important to many companies.

How Insurance Companies Treat Restitution and Disgorgement 

Some insurance policies specifically cover restitution and disgorgement.  But, the most common approach is not to include or exclude, but rather to hide an “exclusion” in the definition of damages or loss for “matters uninsurable as a matter of law.”  In other words, if a particular state’s court has ruled that restitution or disgorgement is not insurable, usually as a matter of public policy, then there is no coverage.  This is an attempt by insurers to have it both ways—to say that they are offering the broadest coverage available, but then when a claim is made, they always argue there is no coverage available.

Obtaining Coverage for Restitution and Disgorgement

One of our clients was hit with an action by the FTC for false advertising, and the FTC sought restitution and disgorgement as remedies.  In this case study dealing with an FTC false advertising claim, we discuss how to obtained a successful and quick resolution, even in a situation where the insurance carrier has denied coverage.    Watch the video to learn how policyholders can successfully obtain coverage for restitution and disgorgement damages.

For a transcript of the video please see below.

Remedies of restitution and disgorgement are old ones. Restitution means you have to give something back for something you wrongfully had. Disgorgement is something where you have to give to a third-party something you wrongfully obtained. Getting insurance coverage for restitution and disgorgement can be a difficult situation. In these days, it arises in different contexts. For example, fraud cases are a common one, where a party has to give back something it fraudulently obtained to another party. It also comes up in the context of false advertising, for example, where a company makes money from product where it falsely advertised it. The money has to be paid back either to the consumers or to a federal agency.

In the insurance coverage context, insurance policies address this in different ways. Some policies specifically cover restitution and disgorgement, some exclude it, and some say nothing at all. The most common approach in insurance policies is not to specifically exclude it, but to have a provision in the definition of damages or loss that says the insurance won’t cover it if it’s un-insurable as a matter of law. What that means is if a particular state’s courts have ruled, usually as a matter of public policy, that restitution or disgorgement is not covered as a matter of public policy, then the insurance company will deny coverage for it. This is what I call a hidden exclusion in the policy.

In other words, when insurance companies sell the policy, they try to say they’re selling the broadest possible coverage available, and there’s no exclusion in there for restitution or disgorgement. But when a claim is made, they claim that it’s un-insurable as a matter of law, and there’s no coverage at all. We had a client who faced a problem seeking insurance coverage for restitution and disgorgement. In that case, the FTC, a federal agency, had investigated the client for a false advertising scheme. It had alleged that the client had participated in this scheme, and was seeking the remedies of restitution and disgorgement in connection with the revenues the company made associated with a particular product.

The company came to us and tried to see if there was coverage, because the insurance company had denied coverage for the settlement they’d obtained with the FTC. The insurance company had said, using the hidden exclusion in the policy, that restitution and disgorgement were un-insurable under the law of the particular state involved. We took a look at the case law, and found that although it was somewhat unfavorable to our client, the state Supreme Court had not ruled on that particular issue. In particular, they hadn’t ruled that it was against the public policy of the state to get insurance coverage for restitution and disgorgement.

We analyzed case law from other jurisdictions, and we found that there are a number of states that allow coverage for restitution and disgorgement, even for FTC false advertising actions. We made this argument to the insurance company in a letter, and asked them to reconsider their denial of coverage for the settlement. They wrote back saying they stuck with their position, but they were willing to talk with us. This is something that insurance companies often do. Although they maintain their denial position, they were willing to negotiate. We talked with them back and forth, engaged in negotiations, and within two months, had obtained a settlement that was favorable to our client.

This is what happens when coverage counsel knows where to probe, and where the weaknesses are in a particular case, and where the strengths are. That’s how we obtained this result for the client. This type of case is something that internal counsel at the company, risk managers, may not even be aware of, that you’re entitled to get coverage for restitution and disgorgement. This is something that as coverage counsel, we’ve faced a number of times, and we found that there are ways to get coverage if you know what you’re doing.

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