Corporations facing claims seeking disgorgement of ill-gotten gains have reason for concern that a settlement of those claims will leave the company exposed to uninsured defense costs. In recent years, two New York courts have interpreted prevalent Errors & Omissions and Directors & Officers policy language to hold that defense costs incurred in reaching a settlement involving disgorgement are not covered even where a company’s policy language expressly lists defense costs as a covered loss.1 This article examines the flaws in the rationale of these decisions and explores the potential reach they could have for companies facing investigations and lawsuits by government regulators. Until New York courts recognize the improvident approach that these decisions take, this article suggests steps a company may take to decrease the risk that coverage of defense costs will be denied in such cases.
Regulators are seeking more and higher disgorgement orders in recent years than they have in the past.2 The trend is pronounced in the antitrust and Foreign Corrupt Practices Act areas, where the government increasingly seeks disgorgement as a matter of course. Due to the often-sprawling scope of FCPA and antitrust investigations, as well as the multinational nature of many companies at risk to become subjects of such investigations, defense costs can be extremely high. Corporate legal officers facing such investigations, as well as those simply evaluating their current coverage in light of regulatory risks, should be sensitive to the fact that defense costs may not be covered by their existing insurance policies.
Typical Insurance Provisions
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