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

Most E&O and D&O policies are “claims made” policies, which provide coverage for claims asserted during the period the policy is in effect. They typically cover “Losses,” which are defined as amounts, including defense costs, that the insured becomes liable to pay as a result of covered “Claims.” “Claims” are generally defined to include civil and criminal proceedings, as well as some investigative proceedings by government agencies.

In New York and most other states to have addressed the issue, courts typically deny claims seeking insurance coverage for disgorgement and other forms of restitution intended to divest a wrongdoer of improperly acquired funds. Some courts deny coverage on the basis of policy language. Other courts hold that shifting the cost of penalties for corporate wrongdoing to insurers would create a moral hazard by negating the intended deterrent effect of the penalties. Some courts deny coverage on both grounds.3

Defense Costs Incurred

Insurers recently have argued that the public policy against disgorgement insurance is a basis for courts also to deny coverage for associated defense costs. New York courts have agreed. In two cases, they denied coverage for all defense costs incurred in connection with regulatory settlements whose provisions included disgorgement and injunctive relief. Only one other court outside New York appears to have followed their rule.4

In Vigilant Insurance Company v. Credit Suisse First Boston Corporation, Credit Suisse First Boston had purchased a professional liability policy from a number of insurers, including Vigilant. In May 2000, the Securities and Exchange Commission and the National Association of Securities Dealers Regulation began investigating CSFB’s business practices in connection with profits and commissions from IPO underwriting. In January 2002, the SEC sued. Shortly thereafter, CSFB settled with both agencies. Without admitting or denying the regulators’ allegations, CSFB consented to a final judgment requiring $70 million in disgorgement, a $30 million civil penalty, and injunctive relief.

CSFB sought coverage for its defense costs in the SEC and NASDR investigations and the $70 million disgorgement payment. Vigilant denied coverage and sued for declaratory relief. On summary judgment, the trial court held that CSFB’s disgorgement payment was not insurable under public policy but that its defense costs were covered under the insurance policy’s definition of “Loss.” Both sides appealed.

The Appellate Division, First Department, reversed the trial court’s ruling on defense costs. It held that defense costs were “only recoverable for covered claims” and that, because disgorgement liability was not a covered claim, CSFB’s defense costs also were not covered. As a result, none of the defense costs incurred in the SEC and NASDR investigations were covered.

The next New York case to address this issue was Millennium Partners, L.P. v. Select Insurance Company, which involved regulatory settlements similar to those in Vigilant. The SEC and New York Attorney General commenced investigations into Millennium, a hedge fund, in connection with alleged fraudulent market timing practices. Millennium retained outside counsel, cooperated in the investigations, and adopted remedial measures, including hiring new legal and compliance officers, establishing an internal audit function within the company, and engaging an independent consultant to review operations and compliance and control functions.

In view of the remedial measures, the SEC and Attorney General agreed to settle. Millennium consented to the entry of an SEC administrative order making factual findings of wrongdoing. Millennium neither admitted nor denied the allegations against it, but it agreed to pay civil penalties and $148 million in disgorgement, as well as to injunctive and remedial provisions.

Millennium’s insurers denied coverage for defense costs expended in the investigations, and Millennium sued. On summary judgment, the Supreme Court ruled for the insurers. It held that Vigilant precluded coverage for defense costs because Millennium’s only other monetary losses under the regulatory settlements—disgorgement and civil penalties—were not covered “Losses” under the policy. Citing Vigilant, the Supreme Court, New York County, held that “where defense costs are a component of uninsurable loss, a party may not be reimbursed for those costs as they ‘are only recoverable for covered claims.’” The Appellate Division affirmed summarily.

Problems With Rule

Vigilant and Millennium raise the prospect of illusory coverage for companies who believe that their E&O and D&O policies will cover defense costs in the event of a government investigation or lawsuit. The policy language at issue in Vigilant and Millennium is typical of many E&O and D&O policies, which often include government investigations in their definition of “Claims” and specify defense costs arising from “Claims” as a standalone, covered “Loss.” Taking such language at face value, corporate officers may believe their legal expenses will be covered in the event of a settlement. Under Vigilant and Millennium, however, if disgorgement is part of the resolution—even if the company also agrees to other injunctive relief and is successful in avoiding a damages award—defense costs may not be covered at all.

Neither Vigilant nor Millennium is beyond criticism for its reasoning. In both cases, the courts were not guided by established rules of policy language construction, which require strict adherence to policy language and a finding of coverage in the absence of express language to the contrary. Instead, the courts denied coverage under a general rule that “defense costs are only recoverable for covered claims.” Taking a narrow view of the “Claim” at issue—defining it in both cases as the disgorgement payment itself rather than the underlying regulatory investigation—the courts rejected coverage for defense costs on the ground that the disgorgement “Claim” was not covered.

A good case can be made that the courts reached to create an exclusion that was not contained in the express language of the insurance policies. In both cases, the insurance policies explicitly defined “Claim” to include the underlying government proceedings, regardless of resulting remedies,5 and identified “Defense Costs” as a standalone “Loss” for which coverage was provided. Indeed, Millennium’s policy included an endorsement specifically defining “Claim” to include “any investigation into possible violations of law or regulation initiated by any governmental body” and “Defense Costs” to include “legal fees and expenses incurred in the investigation and/or defense” of such investigations. Under those definitions, the courts arguably should have concluded that defense costs incurred in the underlying investigations were covered regardless of whether the disgorgement components of the ultimate settlements were not.

There are also public policy reasons, not addressed by the courts, that favor coverage. In both Vigilant and Millennium, the underlying factual allegations could have supported claims for insurable monetary relief in addition to disgorgement. The companies incurred defense costs that helped them institute remedial measures that persuaded the regulators not to pursue those claims. Disregarding the obvious public good derived from these remedial measures—which even the regulators recognized—the courts instead focused only on the disgorgement order as a basis to deny coverage for defense costs. In so doing, the courts also failed to apportion defense costs expended in successfully resolving the non-disgorgement claims.

While shifting the costs of disgorgement orders to insurers may be inconsistent with a deterrent purpose, the same is not necessarily true for defense costs. Instead, the rule of Vigilant and Millennium seems to deter companies from protecting themselves by incentivizing them not to hire counsel in cases where disgorgement is a possible outcome. New York public policy does not favor such a result.

Seeking to Reduce Risk

Despite Vigilant’s and Millennium’s questionable logical and public-policy underpinnings, we see no indication that the New York Court of Appeals will have an opportunity in the near future to review the improvident rule of those cases. Thus, companies seeking to reduce their risk of non-coverage for defense costs must do so within the confines of these cases’ holdings. Companies are left with two options—strengthen their insurance policy language or structure their settlements so as to avoid the Vigilant/Millennium rule.

Purchasers of new policies should seek policy language specifically addressing defense costs incurred in defending claims that result in an uninsurable loss such as disgorgement. Vigilant and Millennium did not articulate a general public policy bar against insuring defense costs in this context; they held that the policy language at issue in those cases should be interpreted as disallowing them. If policy language is clarified to explicitly cover defense costs in the disgorgement context, Vigilant and Millennium should not preclude recovery.

Companies whose insurers will not agree to modify existing policy language may consider purchasing an additional policy or endorsement targeted toward risks of government investigations in particular subject-matter areas. In recent years, at least two carriers have offered products targeted toward securities and FCPA investigations.6 As defense costs continue to rise, it would not be surprising if such policies became standard for companies facing heightened investigative risk.

Another approach to address Vigilant and Millennium is to structure a settlement payment as compensatory rather than disgorgement. Depending on which regulator a company is negotiating with, however, the regulator’s enabling statute can limit the company’s ability to pursue this approach. In most cases, for example, the SEC is empowered to seek penalties, disgorgement, and injunctive relief, but not civil damages. It is questionable whether the SEC could fashion a monetary remedy in most cases that would not be deemed punitive and thus uninsurable under New York’s public policy. In contrast, the Attorney General’s office is empowered under the New York Executive Law to seek damages in addition to punitive awards.7 The Attorney General did so in Millennium. Millennium might have avoided non-coverage of defense costs by characterizing its settlement payment as compensatory rather than disgorgement.

Even if a regulator is able and willing to structure a payment as compensatory, the settling company should carefully analyze the settlement language to ensure that a reviewing court will not conclude that the payment is disgorgement despite the parties’ contrary intention. Simply removing the term “disgorgement” from the settlement agreement is likely not sufficient. In determining whether a settlement payment is disgorgement such that it cannot be insured, courts will look beyond the words used to describe the payment and analyze the function of the payment in the context of the settlement as a whole.8 If the settlement incorporates regulators’ factual allegations against the company, a court will more likely view a settlement payment as disgorgement, particularly if the allegations describe wrongdoing that profited the company.9

Companies may attempt to reduce their risk by neither admitting nor denying the regulators’ factual allegations. However, if there are other indicia in the settlement agreement indicating that the real purpose of the payment is to disgorge ill-gotten gains, a court will likely deny coverage even though the company has not admitted the regulators’ allegations.10 Given these uncertainties, most companies would be better advised to modify or supplement their insurance policies in advance of a government investigation rather than wait until settlement negotiations, when the company is at its most vulnerable vis-à-vis its insurers and regulators.

John S. Siffert and Matthew G. Coogan are partners at Lankler Siffert & Wohl. Siffert is also an adjunct professor at NYU School of Law and a Fellow of the American College of Trial Lawyers.


1. See Vigilant Insurance Company v. Credit Suisse First Boston Corporation, 10 A.D.3d 528 (1st Dept. 2004); Millennium Partners, L.P. v. Select Insurance Co., 24 Misc.3d 212 (Sup. Ct. N.Y. Cnty. 2009), aff’d, 68 A.D.3d 420 (1st Dept. 2009).

2. See generally Adam S. Zimmerman, “Distributing Justice,” 86 N.Y.U. L. Rev. 500, 528 & n.126 (2011); David C. Weiss, “Note, The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence,” 30 Mich. J. Int’l L. 471, 482-88 (2009).

3. See generally Richard F. Hans, “On the Level 3: Reviewing the (Un)insurability of Restitutionary Payments,” 42 Tort Trial & Ins. Prac. L.J. 165 (2006).

4. See Aon Corp. v. Certain Underwriters at Lloyd’s of London, No. 06 CH 16852, 2010 WL 8510173 (Ill. Cir. Ct. Dec. 3, 2010).

5. In the Vigilant policy, “Claim” was defined to include “any civil, criminal, injunctive, regulatory, arbitration, governmental or administrative proceeding for monetary or non-monetary relief,” as well as “a civil, criminal, regulatory, governmental or administrative investigation” and a claim “which alleges any violation(s) of any federal, state and/or foreign securities law, rule or regulation.” In the Millennium policy, “Claim” was defined to include “any judicial or administrative proceeding…against…the Insured Company or any Insured(s) for a Wrongful Act as a result of which the Insured Company or such Insured(s) may be subjected to a binding adjudication of liability for damages or other relief,” as well as “any investigation into possible violations of law or regulation initiated by any governmental body…involving any Insured(s) or the Insured Company(s).”

6. See Marsh, “FCPA Corporate Response: Insurance Coverage for FCPA Investigation Costs,” (last visited Oct. 29, 2012); Press Release, Chartis, Chartis Introduces Investigation Edge, Insurance Coverage for SEC Investigations, (last visited Oct. 29, 2012).

7. See N.Y. Exec. Law §63(12).

8. See, e.g., J.P. Morgan Secs., 91 A.D.3d at 231-23.

9. See, e.g., Millennium, 24 Misc.3d at 214; Vigilant, 2003 WL 24009803, at *4; Reliance Group Holdings, Inc. v. Nat’l Union Fire Ins. Co., 188 A.D.2d 47, 55 (N.Y. App. Div. 1st Dept. 1993); see generally Robert N. Sayler, et al., “Directors and Officers Liability Coverage,” 7 Bus. & Com. Litig. Fed. Cts. §79:33 (3d ed.).

10. See J.P. Morgan Secs., 91 A.D.3d at 104.