Insurance case law developments

In Astellas U.S. Holding, Inc. v. Fed. Ins. Co., 64 F.4th 1055 (7th Cir. 2023), the Seventh Circuit found that a drug manufacturer’s settlement of an FCA investigation was covered and held that the policyholder’s settlement did not constitute uninsurable restitution or disgorgement.

The U.S. Department of Justice issued a civil investigative demand (CID) in connection with an investigation of Astellas U.S. Holding relating to possible violations of the FCA and other federal laws. Astellas reported the Justice Department’s investigation to its directors’ and officers’ (D&O) liability insurers. Astellas ultimately settled the case for $100 million, $50 million of which was expressly referred to in the settlement agreement as “restitution to the United States,” but Astellas did not admit liability or any wrongdoing in the settlement agreement.

Astellas’ D&O liability insurer denied coverage for the settlement. In the subsequent insurance coverage action, the federal district court ruled in Astellas’ favor and rejected arguments that the settlement payment was uninsurable restitution or disgorgement because a portion of the payment was labeled “restitution” for tax reasons. The district court held that Illinois public policy did not bar coverage, despite the government’s allegations about Astellas’ intent to profit from its donations to the patient assistance plans. The district court found that the damages sought by the government were “primarily (if not solely) compensatory damages under the FCA meant to cover the government’s losses in the form of Medicare payments.”

On appeal, the Seventh Circuit affirmed and held that the insurer had not carried its burden of showing that the portion of the settlement payment for which Astellas sought coverage was uninsurable restitution under the D&O policy. The Seventh Circuit explained that there must be evidence of profit, benefits, or proceeds, and that the insurer had not met its burden of establishing that coverage was excluded. The Seventh Circuit found that the D&O policy provided coverage to the limits of applicable law and public policy and provided coverage for settlements, even for claims alleging deliberate fraud and willful violations of the law, so long as there was no final adjudication of such conduct.

The Seventh Circuit rejected the insurer’s argument that coverage was excluded based on Level 3 Commc’ns v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001), where it held that Illinois law “prohibits insurance coverage for losses incurred from settlement payments that are ‘restitutionary in character.’” In determining whether insurance coverage was barred, the Seventh Circuit looked to the “primary focus” of the Astellas settlement and explained “if [the insurer] could show that the settlement payment was ‘not even potentially covered,’ then it would not need to cover Astellas’ settlement.”

Among other things, the Seventh Circuit reviewed the history and purpose of the FCA and determined that the FCA did not provide for the remedy of restitution or disgorgement. The Seventh Circuit refused to treat “damages” under the FCA as “restitutionary” rather than compensatory. Significantly, the express reference in the settlement agreement to the settlement payment as “restitution to the United States” for tax reasons did not change the analysis. The Astellas decision recognized that certain forms of “compensatory damages” can be characterized as “restitution” or “restitutionary,” but such insurer characterizations do not preclude coverage.

In another victory for policyholders, the Delaware Supreme Court recently held that a “professional services exclusion” in a management liability/D&O policy does not apply to bar coverage for a government FCA investigation of a mortgage lender. See ACE Am. Ins. Co. v. Guaranteed Rate, Inc., 2023 WL 5965619 (Del. Sept. 14, 2023).