D&O: Is it Covered? Disgorgement, Restitution, Ill Gotten Gains

By Susanne Murray, Executive Vice President, Alliant

Some D&O policies expressly say that Loss does not include restitution or other restitutionary amounts such as disgorgement, claw-back reimbursement, return of ill-gotten gains or other amounts required or demanded to be paid back (collectively restitution for purposes of this note).

Although all of these terms are used interchangeably at times, they can generally be distinguished as follows:

Restitution – returning, restoring or preserving money or other property, or the value of such other property, to the proper owner.

Disgorgement – the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. This is an equitable remedy designed to deter future violations and to deprive wrongdoers of the proceeds of their wrongful conduct.

Reimbursement of amounts that are considered to be ill-gotten gain – amounts obtained by dishonest means.

Claw-back amounts –  such amounts are most notably laid out in Section 304 of the Sarbanes-Oxley Act of 2002 (recovery of certain compensation required because of misconduct) and Section 954 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (recovery of erroneously awarded compensation without the misconduct requirement).

The definition of covered loss differs by Insurer and insurance policy so some cover a wider array of costs than others (for example, plaintiff’s attorney fees are sometimes specifically listed in the definition).  Most generally include the following amounts as covered loss:

  • Damages, judgments, pre- and post-judgment interest, settlements and defense costs;
  • Punitive, exemplary and multiplied damages;
  • Certain types of fines and penalties, such as limited Foreign Corrupt Practices Act civil fines and penalties and similar anti-bribery laws within and outside the U.S.  In some instances, a broader range of fines and penalties may be insured.

Recent D&O policies may also expressly include some element of claw-back costs. This expansion of coverage specifically for claw-back costs is generally accompanied with language that this does not include payment, return, reimbursement, disgorgement or restitution of any such amounts requested or required to be repaid. Instead, the policy will cover the cost incurred to facilitate the return of some amounts.

The definition of Loss typically includes a list of amounts that are not covered, often including fines, penalties, taxes, environmental clean-up costs, and matters uninsurable under the law. The great majority of policies do not mention disgorgement or restitution other than in connection with claw-back coverage.

In addition to the definition of covered loss, the most likely exclusions on a D&O policy that might be relevant to coverage for actual or alleged restitution are the personal profit or advantage exclusion and any exclusion for an accounting of profits (not a standard exclusion). When considering the potential for coverage for restitution, these exclusions and any other potentially applicable exclusions should be closely examined to determine if they are implicated. For example, if the exclusion is only triggered once there is a final adjudication that the prohibited conduct occurred, then allegations of such prohibited conduct, or specific relief sought in such claims, until such final adjudication are not excluded from coverage.

There are some coverage issues to consider when thinking about coverage for restitutionary amounts:

Do you want coverage for this?


  • Protects individuals from taking money out of their own pockets
  • Protects balance sheet where company indemnifies individuals


  • Erodes policy limits
  • May send the wrong message and can damage reputation (being seen as condoning wrongful conduct)

Can you get coverage for this?

  • Defense costs coverage?
  • Express coverage?
  • Can silence mean coverage?

As indicated in the beginning of this note, some Insurers expressly exclude coverage. Those Insurers without express exclusionary language in their policies do at times still assert that such amounts are not covered loss for several reasons:

  • The amounts are uninsurable or insurance payments are otherwise against public policy
  • For public companies, claims for restitution  may not flow from securities claims and therefore may not be covered for the entity
  • A personal profit or financial advantage exclusion may preclude coverage if the exclusion is triggered

Express coverage for actual restitution, disgorgement, return of ill-gotten gains or claw back amounts is uncommon and largely unavailable. It is still worth further discussion, particularly when considering the possibility of insuring such amounts outside the U.S. and the supervision of U.S. courts.

Facilitation costs in connection with claw-back claims is generally available though at times must be requested as it is not necessarily in the boilerplate of every policy.

Defense costs coverage would generally be available for claims seeking such damages whether or not expressly stated. Most policies will expressly state it anyway.

Overall, the question of coverage for payment of disgorgement, restitution, ill-gotten gains or claw-back amounts is worth the conversation.

D&O liability exposure and insurance trends and how to manage them

By: Fred T. Podolsky, Executive Vice President, Alliant

D&O exposures come from claims “fads” like IPO Laddering or credit crisis claims or disclosure only settlements driven by the plaintiff’s bar, but these fads are usually short lived. Some liability trends, however, such as securities class actions and whistleblower claims, appear to be a continuing and growing source of liability and with no end in sight. Below is a sampling of current D&O liability triggers:

Shareholder Merger Objection Claims
All types of companies, in all industry sectors in the United States and across the globe, engage in substantial mergers and acquisitions activity. For public companies, this is an invitation for a lawsuit, and the invitation is almost always accepted by shareholders who object to the deal, sometimes on both sides of the transaction.

Jumpstart Our Business Startups Act (JOBS Act)
The JOBS Act was passed to make it easier for smaller businesses to access the capital markets through a streamlined IPO process. Emerging growth companies with less than $1 billion in sales are eligible for a JOBS Act filing and can take advantage of the reduced filing requirements, including relief from certain disclosure and accounting standards for a period of time.

SEC Enforcement Activity
While securities class actions continue to represent the highest financial risk exposure to public companies and their directors and officers, the threat of SEC enforcement activity is on the rise. The costs of resolving such enforcement actions can be substantial. According to a report entitled “SEC Enforcement Activity against Public Companies and Their Subsidiaries Midyear FY 2016,” one trend to watch is the increasing use by the SEC of administrative proceedings rather than civil proceedings to bring enforcement actions.

Sarbanes-Oxley Act of 2002 (SOX) and Claw-back Provisions
To ensure the accountability of the CEO and the CFO, and to align their financial interests with accurate reporting, the Act includes a payback, or claw-back, provision requiring that, in the event of a financial restatement due to misconduct of the issuer, the CEO and CFO would be required to repay any bonuses, incentives, and equity-based compensation and any profits from stock sales within the immediately prior 12 months.