Payment Found Insurable Even Though Partly for Restitution

By Don R. Sampen, published, Chicago Daily Law Bulletin, June 13, 2023

The 7th U.S. Circuit Court of Appeals recently held that an insurer’s directors and officers policy covered an insured’s settlement for allegedly participating in a kickback scheme, despite the fact that a portion of the settlement may have been for restitution.

The case is Astellas US Holding, Inc. v. Federal Insurance Co., 2023 U.S. App. Lexis 10883 (May 3). The insured, Astellas, was represented by Jones Day of Dallas, Cleveland and Chicago. Cozen O’Connor of Chicago represented the insurer, Federal.

Astellas was a pharmaceutical manufacturer that sold a drug used to treat metastatic prostate cancer. The drug was expensive, costing $7,800 per month, with Medicare covering about $6,000 per month, leaving patients with a co-pay of $1,800.

To assist patients with the co-pay, Astellas contributed over time about $27 million to two apparently private patient assistance funds, and also another $130 million to other funds that focused on prostate cancer. The company claimed that its motives were charitable, but it also acknowledged that it hoped to make a return on its investment in the drug.

In 2017, the U.S. Department of Justice began investigating Astellas’ contributions. It then issued a civil investigative demand relating to possible violations of the False Claims Act, the Anti-Kickback Statute, and the criminal health care fraud provision of the Health Insurance Portability and Accountability Act.
Focusing on the government’s Medicare payments attributable to Astellas’ contributions to assist with patients’ co-pays, the Justice Department sought recovery of $164 million. The parties later entered into negotiations, and without litigation having been filed, a settlement was reached for $100 million, $50 million of which was labeled as “restitution” for tax purposes.

Following the government settlement, Astellas turned to its insurers for reimbursement, all of whom initially denied coverage. It was nonetheless able to reach a settlement with all but one, Federal, from which Astellas demanded the $10 million limit under the D&O policy.

The Federal policy covered “loss” arising from “wrongful acts,” which included at least two of the statutes asserted by the government. The term “loss,” moreover, included settlements, and included punitive damages but only if “insurable under the applicable law.”

The policy further contained two “final adjudication” exclusions, which excluded coverage attributable to improper or illegal payments and to fraudulent acts if a “final non-appealable adjudication” establishes that a violation occurred.

Astellas brought suit against Federal for the policy limit, and upon cross-motions for summary judgment, the trial court found in favor of Astellas, holding that Illinois public policy did not forbid coverage of the settlement. Federal filed this appeal.

Analysis

In an opinion by Judge David Hamilton, the 7th Circuit affirmed. He began by observing that Illinois law does, in fact, prohibit insurance coverage for certain kinds of damages, including criminal fines and punitive damages, as well as settlement payments that are “restitutionary” in character.
He proceeded to expand on what “restitutionary” means. That term includes payments that disgorge from the defendant something that belongs to the plaintiff and seeks to deprive the defendant of the net benefit of an unlawful act.

In this case, Astellas’ $100 million payment appeared to be at least in part restitutionary, but it was also partly not. Under those circumstances, Hamilton said an insurer’s duty to indemnify is typically determined by the “primary focus” of the litigation. Here, where there was no actual litigation, the court would draw inferences based on the claims the government would likely have brought if it actually pursued litigation.

Federal contended that those inferences supported a finding that the government would have pursued, and Astellas would have been found guilty of, fraud and restitution claims under federal kickback and related statutes. Hamilton disagreed, finding that the evidence was not strong enough to support such a conclusion.

He relied in part on evidence that Astellas followed advice of counsel, by both its own attorneys and those of the charitable funds, regarding the structure of the funds and making of the charitable donations. Thus, wrote Hamilton, each side could point to evidence regarding its view of the restitutionary nature of the settlement.

The coverage dispute, however, according to Hamilton, was not the forum for trying the merits of the potential claims against the insured. He thus sought guidance from the remedies available under the federal statutes and found that at least one of them, the False Claims Act, provided only for civil penalties and compensatory damages, but not restitution.

As for the fact that the parties characterized half of Astellas’ payment as restitution for tax purposes, tagging it as such, said Hamilton, was only necessary to make that amount tax deductible, but that was not necessarily probative of Illinois public policy.

Ultimately, Hamilton looked to the fact that neither Astellas, nor Federal, nor the government ever made a calculation of Astellas’ profits, so that the settlement amount appeared to be based, not on the disgorgement of fraudulent profits, but on making the government whole. And even if half the payment could be regarded as restitutionary, the other half would be regarded as insurable.

The court therefore affirmed in favor of Astellas.

Key Points

• An insured’s liability to pay restitution, like its liability for punitive damages, is not normally insurable under Illinois law.
  
• If an insured’s settlement liability includes both insurable and uninsurable amounts, a court will typically look to the primary focus of the litigation or payment.