A federal judge in Minnesota recently held that “restitution” paid to settle a class action lawsuit was covered under the terms of a professional liability policy.  The court in U.S. Bank National Ass’n et al. v. Indian Harbor Ins. Co. et al. rejected the argument frequently used by directors and officers (“D&O”) insurance carriers that restitution, typically defined as the return of money or property to its rightful owner, is “uninsurable” as a matter of law and thus not covered under their policies.  Finding no support for this argument under the pertinent state law and concluding that the policy language implied that the parties had agreed restitution would be covered, unless the policyholder was ordered to pay it as part of a final judgment, the court ruled that the settlement was covered under the terms of the policy.  The decision is a significant development as the policy language at the center of the case is commonly used in standard D&O policies.  Policyholders facing allegations of corporate wrongdoing, claims typically made, for example, in securities class actions, may now see courts taking a closer look at that language and concluding there is coverage for restitution in states where the law does not expressly prohibit it.

The insurance dispute arose after U.S. Bank National Association and U.S. Bancorp (“U.S. Bank”) were named in several class action lawsuits alleging that the bank tried to maximize overdraft fees.  The plaintiffs claimed that U.S. Bank posted customers’ debit-card transactions to their accounts in a way that allowed the accounts to become overdrawn.  U.S. Bank denied the allegations, vigorously litigated its defenses, and plaintiffs ultimately agreed to settle.

U.S. Bank asked their professional liability carriers, Indian Harbor Insurance Company and ACE American Insurance Company, to reimburse the defense costs U.S. Bank incurred in the class actions, as well as the money paid to settle them.  But both insurers refused, claiming that the settlement was not covered.  Their denial was not based on a specific exclusion in the policies that barred coverage for restitution.  The policies they had written, like most standard D&O policies, didn’t contain such an exclusion.  Instead, the insurers argued that their policies included a provision that excluded “matters which are uninsurable,” which, the insurers said, included restitution.

The argument wasn’t new.  It is one that professional liability and D&O carriers have frequently used since 2001 when the U.S. Seventh Circuit Court of Appeals, in a case called Level 3 Communications v. Federal Insurance Company, ruled that restitution was not a covered “loss” under the definition of that term in a D&O policy.  An insured incurs no loss, the Seventh Circuit said, in being compelled to return something to which it was not entitled.  Other courts have concluded that restitution is not insurable for public policy reasons.  Insuring restitution, these courts say, would eliminate the incentive to avoid wrongdoing.

In U.S. Bank, the Minnesota court rejected the insurers’ argument.  It noted that the provisions that the insurers were relying upon, the so-called Uninsurable Provision, excluded coverage only for matters that were not insurable under the state law governing the policy, which the court assumed to be Delaware law based on the allegations of the complaint.  The court said that it could not find any authority under Delaware law which deemed restitution uninsurable.  Nor had Delaware courts precluded coverage on public policy grounds under similar contexts where policyholder sought insurance for punitive damages or civil penalties.

The court also found support for coverage under the policies’ “Ill-Gotten Gains Provision,” which excluded coverage for claims brought about by profit to which the bank was not legally entitled as determined by a final adjudication.  The provision showed that the parties contemplated the possibility of coverage for restitution, according to the court, and implied that they had agreed restitution would be covered unless it was imposed by a “final adjudication,” which was not the case in the class actions because those cases had settled before a decision on the merits.

The insurers are attempting to appeal the court’s order.  We’ll be following these developments.  In the meantime, the Minnesota court’s decision is good news for policyholders, and, if it stands, would be a significant setback for insurers issuing policies with similar language that is governed by Delaware law.  Corporations alleged to have profited from wrongdoing won’t have their insurance benefits denied based upon an interpretation of the policy that reads in an exclusion that isn’t there.