Insurance May Cover Your False Claims Act Settlement

Blogs, Eye on Enforcement

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Eye on Enforcement

On May 3, 2023, the Seventh Circuit affirmed $10 million in insurance coverage for a False Claims Act (FCA) settlement in a case based on alleged Anti-Kickback Statute violations. Astellas US Holding, Inc. v. Federal Insurance Company concerns a settlement of an investigation into whether a pharmaceutical manufacturer’s sponsorship of patient assistance plans violated the Anti-Kickback Statute. The matter settled in the investigatory phase, and no action had been filed against the company.

After agreeing to a $100 million settlement, the pharmaceutical manufacturer demanded the $10 million policy limit from its directors-and-officers liability insurance policy with the defendant Federal Insurance Company. The district court found that an Illinois state law against insurability in cases that would present a moral hazard — and which specifically bars insurance coverage for restitutionary settlement payments — did not prohibit coverage.

As an initial matter on appeal, the Seventh Circuit found that the two exclusions in the policy for “final adjudications” of “improper or illegal remuneration” and “deliberate fraudulent act[s]” did not apply because a settlement was not a final adjudication. Moreover, the court found that the existence of these exclusions showed that the insurer was willing to extend coverage to settlements of these issues as long as there was no final adjudication.

The court then analyzed whether the settlement constituted a compensatory (insurable) or restitution (uninsurable) payment. While the differences between these types of damages can be “tricky concepts to discern,” the court explained that compensatory damages compensate a plaintiff for a loss, while restitution disgorges fraudulently obtained profits from a defendant.  More specifically, a settlement payment is restitutionary in two scenarios: (1) “if the payment disgorges something that belongs of right not to the defendant but to the plaintiff,” and (2) if the payment “seeks to deprive the defendant of the net benefit of the unlawful act.”

To establish that the entire payment was restitution, the insurer needed to support an inference that the pharmaceutical manufacturer would have been liable if the claims had been litigated. The court examined the state of the case at settlement and determined that the facts of the case did not show that there was sufficient evidence of scienter for this inference. The court found that the insurer had not proven that the settlement payment was restitution, stating that the insurer “confuses an (implied) allegation of fraud with conclusive proof of such fraud.”

As many FCA settlements have since the Tax Cuts and Jobs Act in 2017, the settlement agreement explicitly stated that half of the $100 million payment was restitution, but the court disregarded this language, finding that “the parties’ label isn’t important,” that the label was just “for federal tax purposes,” and that it was not probative on the issue of Illinois public policy on insurability. Even if the label were important and probative, it would only apply to half of the settlement payment.

Without proof from the insurer that the payment was fully restitutionary, the Seventh Circuit found that insurance coverage was available to the insured for its FCA settlement.