Insurance Industry's Disgorgement Defense Hits A Wall

For decades, and especially since the turn of the millennium, policyholders seeking claims under directors' & officers' and professional liability insurance policies have been bedeviled 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, policyholders won a major victory with the decisions in U.S. Bank N.A. v. Indian Harbor Insurance Co., 68 F. Supp. 3d 1044 (D. Minn. 2014), where the court twice rejected an insurance company’s attempt to limit coverage based on a phantom “disgorgement” exclusion not found anywhere in the professional liability insurance policy at issue. Taken together with several other recent decisions rejecting similar “disgorgement” defenses, the court’s decision in U.S. Bank marks a turning point in the efficacy of the coverage defense — which has been misused by insurance companies for decades to escape their obligations under the insurance policies that they sell. Recent decisions include one by the New York Supreme Court issued on April 17 reiterating a finding of coverage for Bear Stearns' alleged facilitation of late trading and deceptive market timing, as discussed in the article.