A number of companies have been sued by the FTC in recent years, alleging, for example, that the company made claims regarding the product or service without adequate substantiation. Many of these companies are small private companies with limited resources. These companies frequently have “Management Liability” or “Private D&O” coverage which may provide relief. Many insureds do not understand that these polices are different than public company D&O policies, because Management Liability policies provide broad coverage for the company itself, not just for the directors and officers. If a company is sued by the FTC, these policies may provide coverage whether individual defendants are named or not.
If only the company is named, there may or may not be an exclusion for “unfair trade practices;” if not, the claim against the company may be covered. If individuals are also named, the coverage is broader. Typically, the exclusion for “unfair trade practices” applies only to the company, not the individuals. Thus, the carrier will often pick up the defense for individual defendants in FTC investigations or complaints.
The carrier will still dispute whether it has any obligation to pay a settlement, either for the company or the individuals. Carriers will typically argue that any FTC monetary remedy is a form of uninsurable restitution or disgorgement. Again, there are strong arguments to the contrary. First, as to the company, there is case law accepting the argument that the settlement of a restitution claim is a compromise of a disputed claim, not “restitution,” and is therefore not barred by public policy. See U.S. Bank Nat. Assoc. v. Indian Harbor Insurance Company, 68 F.Supp.3d 1044 (D. Minn. 2014). Second, in cases with individual defendants there are additional arguments. Typically, the individual defendants are not asked to disgorge any sums they personally received. Rather, they face liability in damages for the amount of the company’s gain. See FTC v. Ross, 743 F. 3d 886 (4th Cir. 2014) (an individual can be jointly liable as a “control person;” individual was “jointly and severally liable for equitable monetary consumer redress” imposed on the company). Thus, the individual is being held liable for the amount of the company’s gain, not any personal gain. As such, there is no public policy bar to indemnification of a settlement on his behalf.
Even if they accept this argument, the carrier will argue that most of the settlement must be allocated to the company. Again, there is no basis for such a position. Under Nordstrom, Inc. v. Chubb & Son, Inc., 54 F. 3d 1424 (9th Cir. 1995), the courts follow the “larger settlement rule.” Under this rule, if the liability of a covered director or officer is co-extensive with the uncovered liability of the company, the insurer must pay 100% of the liability. Thus, the individual’s joint liability can lead to recovery by the company of 100% of both defense costs and indemnity.
Insureds should promptly engage coverage counsel when any formal or informal investigation has been initiated by the FTC. The Management Liability coverage is claims-made and must be reported within the policy period. Coverage is lost if the claim is not timely reported, and it is often difficult to determine when the FTC process ripens into a claim. Moreover, proactive steps are required to assure that the claim is defended and resolved in a way that will maximize the available insurance.