Delaware Trial Court: “Final Adjudication” Exclusion Trumps “No Loss” Argument

A Delaware trial court has concluded that a qui tam settlement was a covered “Loss,” declining to decide whether the settlement constituted uninsurable restitution.  Gallup, Inc. v. Greenwich Ins. Co., 2015 WL 1201518 (Del. Super. Ct. Feb. 25, 2015).  The court also held that a professional services exclusion did not bar coverage.  The court did not determine whether Delaware or Nebraska law applied, finding no conflict in the two states’ laws, but applied “general principles of contract construction.”

The insurer issued a policy to a polling and consulting company affording management, fiduciary and employment liability coverage parts.  The insured was sued by the United States Government in a qui tam action, alleging it knowingly mischarged the government by billing labor to a cost-based contract when the labor was actually performed to fulfill other contracts.  The insured sought coverage, and the insurer paid $8.7 million in defense expenses and for a related employee retaliation claim.  The insured also sought coverage for a $10.58 million settlement with the government.  The insurer denied coverage for the settlement on the basis that it either constituted fines, penalties, or multiplied damages, which were expressly carved-out of the definition of covered “Loss,” or restitution of overpayments by the government to the insured, which is uninsurable as a matter of public policy.

The court found that the settlement constituted “Loss” because “Loss” was defined to include “settlements.”  The court reasoned that the policy’s inclusion of a “Fraud/Ill-Gotten Gains Exclusion” helped “inform the Court as to the intent of the parties.”  The exclusion barred coverage for Loss, including defense expenses, in connection with any claim “brought about or contributed to in fact” by any “profit or remuneration gained by any Insured to which such Insured is not legally entitled” “as determined by a final adjudication in the underlying action or in a separate action or proceeding.”  The court concluded that this exclusion “shows that [the insurer] contemplated coverage for restitution and specifically decided that reimbursement for restitution would only be precluded upon a final adjudication that the money Plaintiff received was actually restitution.”  The court further noted that “[a]s the drafter of the Policy, [the insurer] could have precluded coverage of all settlements but it did not.”  The court determined that it did not need to decide whether restitution was insurable as a matter of public policy because, even if the settlement here was for restitution, the policy’s “Fraud/Ill-Gotten Gains Exclusion” required a “final adjudication.”

The court also declined to apply the policy’s exclusion for claims “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged act, error or omission in connection with the Insured’s performance of or failure to perform professional services for others for a fee, or any act, error or omission relating thereto.”  The court reasoned that “[a]s drafter of the Policy, [the insurer] had the opportunity to specifically define ‘professional services’ and failed to do so.”  The court therefore interpreted “professional services” narrowly to include polling and consulting services but not billing practices.  The court reasoned that the exclusion’s lead-in language was “too broad to give meaningful effect to coverage under the Policy” and therefore found that the professional services exclusion did not apply.

The court determined, however, that a contractual liability exclusion may apply and may require some allocation of the settlement at issue.

Wiley Executive Summary

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