Reed Smith Client Alerts

In a ruling likely to have far-reaching consequences for corporate policyholders, a court in the Northern District of Illinois recently held that a False Claims Act settlement qualified as insurable compensatory damages, not uninsurable disgorgement. In Astellas v. Starr Indemnity, et al., No. 17-cv-8220 (N.D. Ill. Oct. 8, 2021), the court rejected two separate arguments by an insurer to avoid coverage based on the labels applied to the settlement payment. First, the court held that labeling a settlement payment as “restitution to the United States,” as required to qualify for tax deductibility under the Tax Cuts and Jobs Act of 2017 (26 U.S.C. section 162(f)), did not change the compensatory (and insurable) nature of the payment. The court further held that although the Department of Justice’s standard-form False Claims Act release labels damages under the False Claims Act as “restitution to the United States,” those damages are intended to “compensate the United States” to make it “completely whole,” and are thus insurable.

Astellas presented the question of whether a False Claims Act investigation and settlement were insurable under Illinois law. The Department of Justice alleged that Astellas, a pharmaceutical manufacturer, had made improper donations to various charitable patient assistance programs causing false Medicare claims to be submitted to the federal government in violation of the False Claims Act and federal Anti-Kickback Statute.

Astellas settled those claims for a payment of $100 million, plus interest, to the United States. The settlement labeled $50 million of that total as “restitution to the United States,” consistent with the Department of Justice’s standard form False Claims Act release. That label – “restitution to the United States” – is designed to satisfy the requirements for tax deductibility under the Tax Cuts and Jobs Act of 2017. That statute provides that amounts paid in settlement to the government are only tax deductible if the payment is “identified as restitution or as an amount paid to come into compliance with such law” in the settlement agreement.  

Astellas demanded that its excess insurer, Federal Insurance Company (a Chubb company), provide its $10 million coverage limits to reimburse Astellas for that $50 million payment. Federal denied coverage, and the litigation ensued.

At summary judgment, Federal attempted to avoid liability by arguing the settlement was uninsurable disgorgement of an ill-gotten gain, under the Seventh Circuit’s decision in Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001). In support, Federal relied primarily on the label “restitution to the United States” in the settlement agreement and cases describing False Claims Act damages as “restitution to the government of money taken from it by fraud.” After a thoughtful and lengthy examination of the issues raised, the court granted Astellas’ motion, holding “the Settlement Payment constitutes a Loss under the Federal Policy, and public policy does not bar coverage.”