Hunton Insurance Recovery Blog

The False Claims Act continues to make headlines. The DOJ announced earlier this year that its fiscal-year recoveries—across 351 settlements and judgments—exceeded $2.2 billion, which was the second-highest number of settlements recorded in a single year. More recently, the US Supreme Court heard oral argument and is poised to issue a decision in a closely-watched FCA case that could radically change the balance of power between the government and industry.

Given this heightened regulatory and judicial scrutiny, it is no surprise that insurance for FCA exposures also continues to develop. Just this month, the Seventh Circuit affirmed an Illinois federal court’s ruling that an insurer must pay $10 million to pay for its portion of a drugmaker’s settlement with the US Department of Justice, hopefully ending the yearslong battle for coverage.

In 2012, Astellas, a pharmaceutical company, launched a new drug to treat metastatic prostate cancer. That drug was only partially covered by Medicare. After the launch, Astellas donated $27 million to two organizations and encouraged the organizations to provide co-pay assistance. This arrangement caught the attention of regulators at the DOJ because federal anti-kickback statutes prohibit pharmaceutical companies from offering any money to induce Medicare beneficiaries to purchase that company’s drugs.

In 2016, the DOJ issued a subpoena to Astellas, beginning its investigation into alleged federal healthcare offenses. And in 2017, the DOJ followed up with a more detailed civil investigative demand. In 2019, Astellas ended the dispute with the government by entering into a settlement where it agreed to pay $150 million. The $150 million payment was labeled as “restitution to the United States” for tax reasons.

After that, Astellas turned to its insurers to cover portions of the settlement. Unsurprisingly, the insurance companies, including Federal Insurance Company, refused to pay. Coverage litigation followed.  

As we’ve discussed previously, Federal denied coverage on the grounds that the settlement was uninsurable restitution or disgorgement and was excluded under the company’s D&O liability policy. The parties moved for summary judgment, and the district court ruled in Astellas’ favor, holding that Federal had failed to meet its high burden of proving that the losses at issue were clearly excluded.

The Seventh Circuit recently affirmed the district court’s ruling. Like the district court, the Seventh Circuit reiterated that Illinois law places the burden on the insurer to show that a settlement payment is uninsurable restitution. It also concluded that Federal was unable to meet the high burden.

Federal argued that settlement was an uninsurable restitutionary payment under Illinois law. While Illinois law prohibits insurance coverage for losses that are “restitutionary in character,” the court acknowledged that the cases distinguish between compensatory and restitutionary payments. It explained that in order for the settlement payment here to be deemed uninsurable, Federal had to show that the payment disgorged either something that belonged of right to the federal government or profit that Astellas made from the alleged scheme. And, here, Federal was unable to make such a showing. Instead, the facts showed that the settlement payment was covered under the insurance policy. The fact that the settlement was labeled as “restitution” did not sway the court.

Takeaways:

The Seventh Circuit’s decision has several takeaways for policyholders.

First, it reinforces the difficult burden insurers face to prove that a loss is uninsurable restitution, especially in the context of settlement agreements. As the court put it:

In this insurance dispute, we need not decide whether Astellas could have won a hypothetical motion for summary judgment on False Claims Act and Anti-Kickback Statute claims if the government had actually filed any. Nor do we need to decide whether the government could have won a motion for summary judgment. The point here is that the parties agreed to settle those potential claims rather than litigate them to a final judgment. Each side would have had some evidence favoring its position, and each side preferred to agree to the settlement rather than litigate. In this insurance dispute, the burden is on Federal to show that the settlement was (entirely) restitutionary in nature, and it has not offered evidence sufficient to show that.

Second, it shows that an insurer cannot rely on labels alone to establish that a settlement is restitutionary in nature or otherwise uninsured. Part of Astellas’ settlement was labeled explicitly as “restitution to the United States.” Nevertheless, the Seventh Circuit dismissed the insurer’s reliance on the label explaining that labels generally aren’t controlling and that the label in question was even less significant because the parties’ communications showed that it was only used for tax purposes.

Last, the decision is a good reminder to policyholders to closely analyze insurer positions against the policy language and not accept an insurer’s preferred interpretation or views of coverage if they are not supported by the language of the policy it drafted and sold. As we’ve discussed before, D&O policies can provide coverage for settlements arising from government investigations and settlements. Experienced coverage counsel can help policyholders understand how a D&O policy may respond to similar claims.