Whether there is insurance coverage for restitution or disgorgement of purported “ill-gotten gains” under Directors and Officers and other professional liability policies (collectively here, D&O policies) has become a pervasive issue in jurisdictions across the country. The increased filings in recent years of consumer and securities class actions, breach of fiduciary duty actions, SEC enforcement actions, and appraisal actions, has added renewed vigor to this judicial debate. Two recent decisions from the U.S. Supreme Court and the First Department in New York, both discussed below, add an important new dimension to this issue and D&O policyholders should not be caught unaware.
What Is the ‘Disgorgement Defense’?
A standard D&O policy defines “Loss” as the total amount an insured becomes legally obligated to pay on account of a claim made against it for “Wrongful Acts,” including but not limited to damages, judgments, settlements, costs, and defense expenses. The definition of “Loss” typically goes on to state that “Loss” will not include: (1) fines or penalties imposed by law, or (2) matters uninsurable by law.
