01
May
2018

Tide Turns on Phantom Exclusion

Corporate Counsel Business Journal

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PUBLISHED ON: May 1, 2018

For decades, the protection provided by directors and officers (D&O) and errors and omissions (E&O) professional liability insurance policies has been weakened by insurance companies invoking the “disgorgement” defense against coverage of a wide array of claims that involve allegations of wrongdoing. Insurance companies use this defense to assert that a given judgment or settlement involves restitution, or the return of ill-gotten gains, rather than a loss per se, and so is not covered.

On this front, the tide has turned in recent years. Policyholders won a major victory in U.S. Bank N.A. v. Indian Harbor Ins. Co., where the court twice rejected an insurance company’s attempt to limit coverage based on a phantom disgorgement exclusion. Followed by more recent decisions rejecting similar arguments, the court’s decision in U.S. Bank marks a turning point in the efficacy of this ubiquitous coverage defense.