The Seventh Circuit Court of Appeals has affirmed a $10 million in insurance coverage for a False Claims Act (FCA) settlement in in which there were allegations of the Anti-Kickback Statute violations. Astellas US Holding, Inc. v. Federal Insurance Companyhttps://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2023/D05-03/C:21-3075:J:Hamilton:aut:T:fnOp:N:3039931:S:0 is about 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.
SPECIFIC QUESTION: COMPENSATORY(INSURABLE) OR RESTITUTION (UNINSURABLE)
The Seventh Circuit says there are wo 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. Also, 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 central question is whether the settlement constituted a compensatory (insurable) or restitution (uninsurable) payment. Compensatory damages compensate a plaintiff for a loss, while restitution disgorges fraudulently obtained profits from a defendant.
To show that the entire payment was restitution, the insurer needs 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.”
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.
Jeffrey Newman is a whistleblower lawyer who handles FCA healthcare and other FCA cases as well as SEC whistleblower cases. He can be reached at 617-823-3217 or at Jeff@JeffNewmanLaw.com