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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.”)
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