Delaware Business Litigation Report

Delaware Superior Court Explains Disgorgement Exclusion In Insurance Coverage

TIAA-CREF Individual & Institutional Services, LLC v. Illinois National Insurance Company, No. N14C-05-178 JRJ CCLD (October 20, 2016)

D&O policies often attempt to exclude from coverage sums paid to disgorge unlawful profits. The underlying theory is that the company did not suffer a true loss when it has to give back something that it never should have had in the first place. This decision tackles the hard problem of applying that theory in specific circumstances. The Court held that when a company settles a claim without admitting it has made an unlawful profit then the insurer has to prove the sums paid were in fact a return of an illegal profit. Merely settling a claim for some amount does not establish disgorgement occurred, even when the claim itself may have made that allegation. In particular, when the actual settlement agreement does not refer to a return of an illegal gain, there is no tie to actual disgorgement and the exclusion may not apply. Hence, when settling a claim it is important to consider how the settlement agreement should read.

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