Coverage for 'Restitution' Claims, Public Policy Notwithstanding

Insurance carriers frequently argue that when insureds face claims for “disgorgement” or “restitution,” they need not defend or indemnify under a wide-range of liability policies. Carriers argue that, at least in California, public policy bars coverage for such claims including claims alleging failure to pay employees overtime, failure to pay taxes and penalties, and, in the intellectual property area, for disgorgement of “ill-gotten gains” or payment of a defendant's profits as a measure of damages. Insurance carriers advance this argument under various policies, including commercial general liability (CGL), directors and officers (D&O), employment practices liability (EPL), and errors and omissions (E&O) policies.

The carriers' argument typically is premised on the California Supreme Court's decision in Bank of the West v. Superior Court, 2 Cal. 4th 1254, 833 P.2d 545, 10 Cal. Rptr. 2d 538 (1992). There, the court addressed the question of coverage under a policy for restitution ordered under the Unfair Business Practices Act. However, the policy involved in Bank of the West was a CGL policy. It provided narrower coverage than is provided by other policies, such as D&O, EPL, and E&O policies. It obligated the insurance carrier to indemnify the insured only for payments of “damages,” while other policies may obligate a carrier to pay for the “total amount” that the insured is obligated to pay, including damages, judgments, settlements, defense costs, and attorneys' fees. Therefore, the Bank of the West holding actually is very limited ' when a policy covers only “damages” and the claim against the insured is one where “damages” are not available, then the policy does not provide coverage. That holding should not preclude coverage under broader policies or as to theories of liability for which damages may be recovered.

Furthermore, simply labeling something “restitution” or “disgorgement” does not mean that coverage is barred as a matter of public policy. As the California Supreme Court has explained:

Reimbursement can reasonably be labeled a restitutive remedy, either because it awards a plaintiff “the very thing to which he was entitled” … or because it attempts to compensate a plaintiff for the cost of performing the duty of another. … This label does not, however, preclude characterization of the amounts in question here as “damages” awarded to compensate a plaintiff. … Indeed, restitution … is frequently denominated as one type of “damages” for descriptive purposes. … Whatever technical distinctions we and other courts have drawn between restitution and compensatory damages in other contexts, in ordinary terms both concepts are within the definition of “damages.” For the purposes of interpretation, this fact is dispositive. AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 835-36, 799 P.2d 1253, 274 Cal. Rptr. 820 (1990).

See Avondale Indus., Inc. v. Travelers Indem. Co., 697 F. Supp. 1314, 1319 (S.D.N.Y. 1988) (“The average businessman does not differentiate between 'damages' and 'restitution;' in either case, money comes from his pocket and goes to third parties.”); Morton Int'l, Inc. v. Gen. Accident Ins. Co. of Am., 134 N.J. 1, 27, 629 A.2d 831 (1993) (“[T]he ordinary usual meaning of 'damages' … does not convey the limitations suggested by [the insurer]. … We thus conclude that the term 'damages' … should be interpreted broadly to encompass … equitable relief. … 'Damages' means money to most people.”)

Coverage also is barred for “restitution” or “disgorgement” (even under policies that insure only “damages”) only in very narrow circumstances. In fact, the California Supreme Court has been careful to explain just how narrow those circumstances are:

These cases are inapposite. … [T]he relief sought in the underlying suits at issue here is not punitive. CERCLA, for example, is a strict liability statute that serves essentially remedial goals, irrespective of fault. … Reimbursement of [the] costs [involved here], moreover, is not restitutive in the narrow sense identified by Jaffe as inappropriate for insurance coverage. (See Jaffe v. Cranford Ins. Co., [168 Cal. App. 3d 930, 935, 214 Cal. Rptr. 567 (1985)] ["Although the concept of 'restitution' may have a broader meaning in other contexts, we limit our reference to it here to situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired."]); in short, we are not persuaded that the relief at issue here is of the narrow type identified by these cases as not a proper subject of coverage by insurance. Id. at 836-37.

Thus, if the underlying claim against the insured is premised on theories of strict liability or negligence, recovery should not be barred. And, coverage should not be barred unless the underlying claimant is seeking the return of something that the insured allegedly acquired from the claimant. Obviously, the public policy bar on coverage will not apply to many types of “restitution.”

In any event, the fact that underlying plaintiffs may measure the amount they seek based on the insured's profits or on wages that they claim should have been paid does not change the type of the award. This is particularly true in at least two contexts. For example, there are many suits now where a purported class of employees claims that they were not paid overtime to which they were entitled. They seek recoveries based on how much overtime they think that they should have been paid. This does not mean that they are seeking “restitution,” rather than “damages.” Indeed, California courts have long recognized that payments measured by allegedly unpaid wages constitute “damages” (even if they also might constitute restitution). See Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 174-175, 999 P.3d 706, 96 Cal. Rptr. 2d 518 (2000) (“Civil Code 3281 defines 'damages.' … Under this definition unpaid wages might be recovered in damages in a civil suit for breach of contract or one premised on fraud or misrepresentation theories. … [T]his court has held that wrongfully withheld salary payments are 'damages.' …”); Olson v. Cory, 35 Cal. 3d 390, 402, 673 P.2d 270, 197 Cal. Rptr. 843 (1983) (“Amounts recoverable of wrongfully withheld payments of salary or pensions are damages. …”); Sanders v. City of Los Angeles, 3 Cal. 3d 252, 262-63, 475 P.2d 201, 90 Cal. Rptr. 69 (1970) (“an action to recover retroactive pay increases is an action for damages”); Benson v. City of Los Angeles, 60 Cal. 2d 355, 366, 384 P.2d 641, 33 Cal. Rptr. 257 (1963) (“clearly the detriment caused by the wrongful withholding of past due pension payments falls within the definition of damages.”)

Likewise, recoveries in intellectual property claims typically constitute “damages,” even if they are calculated based on the amount of profits that the defendant allegedly wrongfully made from its use of the plaintiff's intellectual property. In fact, the calculation of damages in an intellectual property case has been summarized as follows:

Compensatory Damages. 17 U.S.C. '504 [of the Copyright Act] imposes two categories of compensatory damages. Taking care to specify that double recovery is not permitted where the two categories overlap, the statute provides for the recovery of both the infringer's profits and the copyright owner's “actual damages.” It is important that these two categories of compensation have different justifications and are based on different financial data. The award of the infringer's profits examines the facts only from the infringer's point of view. If the infringer has earned a profit, this award makes him disgorge the profit to insure that he not benefit from his wrongdoing. The award of the owner's actual damages looks at the facts from the point of view of the copyright owner; it undertakes to compensate the owner for any harm he suffered by reason of the infringer's illegal act. Davis v. The Gap, Inc., 246 F.3d 152, 159 (2d Cir. 2001).

Therefore, it is not surprising that courts have held that that awards calculated based on the amount of the insured's “ill-gotten gains” are covered under insurance policies as “damages.” See, e.g., Internat'l Communication Materials, Inc. v. Employer's, 1996 U.S. Dist. LEXIS 21825, *20-21 (W.D. Pa. 1996) (claims for disgorgement of profits constitute covered “damages”); Limelight Productions, Inc. v. Limelite Studios, Inc., 60 F.3d 767, 769 (11th Cir. 1995) (Lanham act claims for “false designation of origin” covered because “ill-gotten profits [are] merely another form of damages that the statute permits to be presumed because of the proof unavailability in these actions.”)

Given the above, coverage for claims that are labeled as “restitution” should not automatically be barred under some notion of public policy. Furthermore, if insurance carriers do not intend to cover claims for restitution or claims measured by the insured's alleged “ill-gotten gains,” they have a means available to avoid coverage ' simply placing an express exclusion in their policies. Absent such an exclusion, they should not try to expand a public policy bar to be all encompassing. See KF Dairies, Inc. v. Fireman's Fund Ins. Co., 224 F.3d 922, 927 n.5 (9th Cir. 2000) (“Insurers are free to exclude from coverage liabilities. … 'The simple answer to [the insurer's] contentions is that it should have taken the public policy it urges the court to adopt into consideration when it drafted its contract.'”); Bruce Oakley, Inc. v. Farmland Mut. Ins. Co., 245 F.3d 1027, 1029 (8th Cir. 2001)    (“[T]he insurance company should have explicitly listed [the specific] damage as an exclusion if it was inclined to deny coverage for such damage.”); Merchants Ins. Co. v. USF&G, 143 F.3d 5, 10 (1st Cir. 1998) (“[If [the insurer] had really intended to limit coverage …, [it] was free to draft a policy with qualifying language that expressly implemented that intention.”). Absent such an exclusion, coverage should be afforded for “restitution” claims. See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 764, 28 P.3d 889, 110 Cal. Rptr. 2d 844 (2001) (“[W]e cannot read into the policy what [the carrier] has omitted. To do so would violate the fundamental principal that in interpreting contracts, including insurance contracts, courts are not to insert what has been omitted.”)

Insurance carriers frequently argue that when insureds face claims for “disgorgement” or “restitution,” they need not defend or indemnify under a wide-range of liability policies. Carriers argue that, at least in California, public policy bars coverage for such claims including claims alleging failure to pay employees overtime, failure to pay taxes and penalties, and, in the intellectual property area, for disgorgement of “ill-gotten gains” or payment of a defendant's profits as a measure of damages. Insurance carriers advance this argument under various policies, including commercial general liability (CGL), directors and officers (D&O), employment practices liability (EPL), and errors and omissions (E&O) policies.

The carriers' argument typically is premised on the California Supreme Court's decision in Bank of the West v. Superior Court , 2 Cal. 4th 1254, 833 P.2d 545, 10 Cal. Rptr. 2d 538 (1992). There, the court addressed the question of coverage under a policy for restitution ordered under the Unfair Business Practices Act. However, the policy involved in Bank of the West was a CGL policy. It provided narrower coverage than is provided by other policies, such as D&O, EPL, and E&O policies. It obligated the insurance carrier to indemnify the insured only for payments of “damages,” while other policies may obligate a carrier to pay for the “total amount” that the insured is obligated to pay, including damages, judgments, settlements, defense costs, and attorneys' fees. Therefore, the Bank of the West holding actually is very limited ' when a policy covers only “damages” and the claim against the insured is one where “damages” are not available, then the policy does not provide coverage. That holding should not preclude coverage under broader policies or as to theories of liability for which damages may be recovered.

Furthermore, simply labeling something “restitution” or “disgorgement” does not mean that coverage is barred as a matter of public policy. As the California Supreme Court has explained:

Reimbursement can reasonably be labeled a restitutive remedy, either because it awards a plaintiff “the very thing to which he was entitled” … or because it attempts to compensate a plaintiff for the cost of performing the duty of another. … This label does not, however, preclude characterization of the amounts in question here as “damages” awarded to compensate a plaintiff. … Indeed, restitution … is frequently denominated as one type of “damages” for descriptive purposes. … Whatever technical distinctions we and other courts have drawn between restitution and compensatory damages in other contexts, in ordinary terms both concepts are within the definition of “damages.” For the purposes of interpretation, this fact is dispositive. AIU Ins. Co. v. Superior Court , 51 Cal. 3d 807, 835-36, 799 P.2d 1253, 274 Cal. Rptr. 820 (1990).

See Avondale Indus., Inc. v. Travelers Indem. Co., 697 F. Supp. 1314, 1319 (S.D.N.Y. 1988) (“The average businessman does not differentiate between 'damages' and 'restitution;' in either case, money comes from his pocket and goes to third parties.”); Morton Int'l, Inc. v. Gen. Accident Ins. Co. of Am., 134 N.J. 1, 27, 629 A.2d 831 (1993) (“[T]he ordinary usual meaning of 'damages' … does not convey the limitations suggested by [the insurer]. … We thus conclude that the term 'damages' … should be interpreted broadly to encompass … equitable relief. … 'Damages' means money to most people.”)

Coverage also is barred for “restitution” or “disgorgement” (even under policies that insure only “damages”) only in very narrow circumstances. In fact, the California Supreme Court has been careful to explain just how narrow those circumstances are:

These cases are inapposite. … [T]he relief sought in the underlying suits at issue here is not punitive. CERCLA, for example, is a strict liability statute that serves essentially remedial goals, irrespective of fault. … Reimbursement of [the] costs [involved here], moreover, is not restitutive in the narrow sense identified by Jaffe as inappropriate for insurance coverage. (See Jaffe v. Cranford Ins. Co., [168 Cal. App. 3d 930, 935, 214 Cal. Rptr. 567 (1985)] ["Although the concept of 'restitution' may have a broader meaning in other contexts, we limit our reference to it here to situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired."]); in short, we are not persuaded that the relief at issue here is of the narrow type identified by these cases as not a proper subject of coverage by insurance. Id. at 836-37.

Thus, if the underlying claim against the insured is premised on theories of strict liability or negligence, recovery should not be barred. And, coverage should not be barred unless the underlying claimant is seeking the return of something that the insured allegedly acquired from the claimant. Obviously, the public policy bar on coverage will not apply to many types of “restitution.”

In any event, the fact that underlying plaintiffs may measure the amount they seek based on the insured's profits or on wages that they claim should have been paid does not change the type of the award. This is particularly true in at least two contexts. For example, there are many suits now where a purported class of employees claims that they were not paid overtime to which they were entitled. They seek recoveries based on how much overtime they think that they should have been paid. This does not mean that they are seeking “restitution,” rather than “damages.” Indeed, California courts have long recognized that payments measured by allegedly unpaid wages constitute “damages” (even if they also might constitute restitution). See Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 174-175, 999 P.3d 706, 96 Cal. Rptr. 2d 518 (2000) (“Civil Code 3281 defines 'damages.' … Under this definition unpaid wages might be recovered in damages in a civil suit for breach of contract or one premised on fraud or misrepresentation theories. … [T]his court has held that wrongfully withheld salary payments are 'damages.' …”); Olson v. Cory , 35 Cal. 3d 390, 402, 673 P.2d 270, 197 Cal. Rptr. 843 (1983) (“Amounts recoverable of wrongfully withheld payments of salary or pensions are damages. …”); Sanders v. City of Los Angeles , 3 Cal. 3d 252, 262-63, 475 P.2d 201, 90 Cal. Rptr. 69 (1970) (“an action to recover retroactive pay increases is an action for damages”); Benson v. City of Los Angeles , 60 Cal. 2d 355, 366, 384 P.2d 641, 33 Cal. Rptr. 257 (1963) (“clearly the detriment caused by the wrongful withholding of past due pension payments falls within the definition of damages.”)

Likewise, recoveries in intellectual property claims typically constitute “damages,” even if they are calculated based on the amount of profits that the defendant allegedly wrongfully made from its use of the plaintiff's intellectual property. In fact, the calculation of damages in an intellectual property case has been summarized as follows:

Compensatory Damages. 17 U.S.C. '504 [of the Copyright Act] imposes two categories of compensatory damages. Taking care to specify that double recovery is not permitted where the two categories overlap, the statute provides for the recovery of both the infringer's profits and the copyright owner's “actual damages.” It is important that these two categories of compensation have different justifications and are based on different financial data. The award of the infringer's profits examines the facts only from the infringer's point of view. If the infringer has earned a profit, this award makes him disgorge the profit to insure that he not benefit from his wrongdoing. The award of the owner's actual damages looks at the facts from the point of view of the copyright owner; it undertakes to compensate the owner for any harm he suffered by reason of the infringer's illegal act. Davis v. The Gap, Inc., 246 F.3d 152, 159 (2d Cir. 2001).

Therefore, it is not surprising that courts have held that that awards calculated based on the amount of the insured's “ill-gotten gains” are covered under insurance policies as “damages.” See, e.g., Internat'l Communication Materials, Inc. v. Employer's, 1996 U.S. Dist. LEXIS 21825, *20-21 (W.D. Pa. 1996) (claims for disgorgement of profits constitute covered “damages”); Limelight Productions, Inc. v. Limelite Studios, Inc., 60 F.3d 767, 769 (11th Cir. 1995) (Lanham act claims for “false designation of origin” covered because “ill-gotten profits [are] merely another form of damages that the statute permits to be presumed because of the proof unavailability in these actions.”)

Given the above, coverage for claims that are labeled as “restitution” should not automatically be barred under some notion of public policy. Furthermore, if insurance carriers do not intend to cover claims for restitution or claims measured by the insured's alleged “ill-gotten gains,” they have a means available to avoid coverage ' simply placing an express exclusion in their policies. Absent such an exclusion, they should not try to expand a public policy bar to be all encompassing. See KF Dairies, Inc. v. Fireman's Fund Ins. Co., 224 F.3d 922, 927 n.5 (9th Cir. 2000) (“Insurers are free to exclude from coverage liabilities. … 'The simple answer to [the insurer's] contentions is that it should have taken the public policy it urges the court to adopt into consideration when it drafted its contract.'”); Bruce Oakley, Inc. v. Farmland Mut. Ins. Co., 245 F.3d 1027, 1029 (8th Cir. 2001)    (“[T]he insurance company should have explicitly listed [the specific] damage as an exclusion if it was inclined to deny coverage for such damage.”); Merchants Ins. Co. v. USF&G, 143 F.3d 5, 10 (1st Cir. 1998) (“[If [the insurer] had really intended to limit coverage …, [it] was free to draft a policy with qualifying language that expressly implemented that intention.”). Absent such an exclusion, coverage should be afforded for “restitution” claims. See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 764, 28 P.3d 889, 110 Cal. Rptr. 2d 844 (2001) (“[W]e cannot read into the policy what [the carrier] has omitted. To do so would violate the fundamental principal that in interpreting contracts, including insurance contracts, courts are not to insert what has been omitted.”)