Policyholder Pulse
Purchasers of D&O and professional liability insurance often are stunned when their carriers deny coverage on the theory that their policies do not cover liabilities characterized as “restitutionary,” i.e., where a judgment or settlement requires the insured to “disgorge” a sum of monies. Insurers contend such damages are “uninsurable.” The surprise stems from the fact that some insurers attempt to stretch the argument that restitutionary payments are uninsurable to encompass claims for ordinary compensatory damages – such as breach of fiduciary duty claims or consumer class actions – arguing that these claims are asking the insureds to return “ill-gotten gains.” While it is far too early to administer last rites to the “restitution/disgorgement defense,” recent rulings 
suggest that the courts have recognized that denying claims based on vague concepts of “insurability” creates too much uncertainty for policyholders and have found several ways to curtail this overreaching practice.
Most of the time, such insurer demands are unjustified. But companies should understand when and under what circumstances insurers might seek reimbursement or recoupment of defense costs so they can avoid agreeing to do so unnecessarily or at least plan in advance financially.