Pillsbury Winthrop Shaw Pittman

US Bank v Indian Harbor: another blow to the restitution/disgorgement defence

By Peter Gillon and Vernon Thompson

In recent years, purchasers of directors and officers (D&O) and professional liability insurance have been stunned to learn that their carriers have denied coverage for a wide range of claims on the theory that their policies do not cover loss that could be characterised as restitutionary in nature or where a judgment or settlement requires the insured to ‘disgorge’ a sum of monies. Now, however, the tide may be turning against this overreaching practice. Although it is far too early to administer last rites to the ‘restitution/disgorgement defence’, a compelling opinion penned by judge Paul Magnuson of the District of Minnesota, in US Bank v Indian Harbor Insur. Co, along with other recent court rulings, suggests that its expanding use has been severely curtailed. Applying Delaware law, the court flatly rejected insurers’ arguments that the defence precluded coverage under a professional liability policy for amounts the insured bank agreed to reimburse customers in a settlement over claims that the bank charged excessive overdraft fees.

The restitution/disgorgement defence usually rests on standard policy language defining covered ‘loss’ to exclude amounts that are uninsurable as a matter of law, and the argument that applicable state law does not permit insurance companies to indemnify an insured for the payment of restitution or the disgorgement of ill-gotten gains. In many instances, insurers assert this defence even when there is no case or statute declaring restitutionary payments uninsurable. The defence may also include a secondary argument that when a policyholder is ordered to return monies it has obtained unlawfully, there is no basis for coverage because the insured has suffered no economic loss. This argument was articulated most forcefully in an opinion by judge Richard Posner in Level 3 Communications Inc v Federal Insurance Co…

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