An Illinois federal district court has held that a lawsuit seeking to recover amounts an insured wrongfully refused to pay to another sought only uninsurable restitutionary-type relief, not “Damages,” and thus did not trigger an insurer’s defense obligations under an E&O policy.  Westport Ins. Corp. v. M.L. Sullivan Ins. Agency, Inc., 2017 WL 56635 (N.D. Ill. Jan. 5, 2017).

The insureds, an insurance broker and one of its employees, were sued by an insurer for allegedly misrepresenting underwriting data to it when procuring coverage on behalf of their clients.  The insurer alleged that the insureds operated a fraudulent scheme in which they calculated premiums based on certain data from their clients, but before remitting premiums to the insurer, they changed the data to decrease the premium amounts – and they then kept the difference.  The underlying suit alleged causes of action for negligent misrepresentation and intentional wrongdoing, and it sought “to recover premiums collected and wrongfully withheld” as well as unspecified “compensatory damages” and “all such further and other relief.”  The insureds tendered the suit under their professional liability policy, and the insurer filed a coverage action seeking a declaration that it owed no duty to defend or indemnify the underlying suit.

In ruling on the professional liability insurer’s motion for summary judgment in the coverage action, the court ruled first that the complaint alleged a “negligent act, error, or omission” and thus a “Wrongful Act” under the policy.  The court noted that while the complaint generally alleged an intentional scheme, the federal rules permit pleading in the alternative, and the complaint contained a count specifically for negligent misrepresentation.  On that basis, the court determined that the complaint arguably alleged negligent conduct and thus potentially implicated coverage notwithstanding that the main thrust of the underlying claim was that the insureds defrauded the claimant.

The court next held, however, that the insurer had no duty to defend because the underlying suit did not seek “Damages.”  The court noted that the term “Damages” did not include “reimbursement or return of premiums,” “restitution” payments, or “matters deemed uninsurable under the law.”  The court held that any of those three prongs would preclude coverage here.  In so ruling, the court noted that disgorgement under Illinois law is not “loss” and is uninsurable.  The court also rejected the insureds’ argument that the underlying suit’s demand for “compensatory damages” and “all such further and other relief as the Court deems just and appropriate” alleged covered “Damages” and thus implicated a duty to defend, ruling instead that such “boilerplate” language did not expand the relief sought and could not be used to create a duty to defend.