An insurer in Washington could not eliminate its coverage obligation based on its insured’s recovery from a third party. T-Mobile USA, Inc. v. Steadfast Ins. Co., et al., No. 82704-9-I, 2022 WL 17246715 (Wash. Ct. App., Nov. 28, 2022). And in an Illinois case, an insurer could not refuse to cover its insured simply because its insured was able to deduct part of its settlement payment (which the insurer had refused to cover) from its tax obligation. Liberty Ins. Underwriters, Inc. v. Astellas Pharma US, Inc., Circuit Court of Cook County, Illinois County Dept., Chancery Div., 2019 CH 14483 (Nov. 28, 2022). In both cases, the courts did not have any sympathy for insurers that refused to perform under their insurance policies in the first place and then tried to take advantage of their insureds’ recoveries or reductions in liabilities. And the courts were intent on holding the insurers to the plain language of the policies and the promises they had made to the insureds.

In Washington, T-Mobile purchased a liability policy from Steadfast that covered data breaches. The policy had a $10 million self-insured retention and a $15 million limit on top. A T-Mobile vendor – Experian – suffered a data breach, and T-Mobile was hit with class actions, individual lawsuits, and state and federal regulator inquiries as a result. T-Mobile incurred $17.3 million in costs and expenses related to the breach. When T-Mobile sought coverage, Steadfast denied the claim arguing that T-Mobile’s subsequent $10.75 million recovery from Experian meant that T-Mobile’s “loss,” as defined under the policy, did not exceed the $10 million retention.

The Washington Court of Appeals had no trouble concluding that all $17.3 million constituted “loss,” which, as in many liability policies, was broadly defined. “Loss” excluded, however, “any amount for which the Insureds are absolved from payment.” Steadfast said that the recovery from Experian “absolved” T-Mobile of payment and thus had to be counted against the $17.3 million. The appellate court rejected this argument. “Absolve” means “to set free or release from some obligation, debt, or responsibility,” according to the dictionary. And recovery from Experian did not “absolve” T-Mobile from the costs and expenses it incurred from the data breach. Instead, T-Mobile remained directly liable for those obligations and paid them in full.

Steadfast also argued that its own $7.3 million coverage obligation should be offset by T-Mobile’s $10.75 million recovery, which would result in, wait for it…. no coverage. An insurer is only entitled to offset an insured’s recovery from a third party, however, if it is expressly permitted under the policy and the insured has been fully compensated by the applicable measure of damages. The court did not find any provision in the Steadfast policy that allowed Steadfast to offset the Experian recovery against its own coverage obligations, and it quickly dispensed with that argument as well.

In Illinois, Astellas Pharma US, Inc. found itself in the middle of a False Claims Act investigation by the federal government. The company manufactured and sold Xtandi, a drug used to treat certain types of prostate cancer. To ensure that all eligible patients had access to Xtandi, Astella gave money to certain funds overseen by Patient Assistant Programs, and those funds provided direct financial support for patients undergoing cancer treatment, including covering patient co-pays for Xtandi (but not other similar drugs). According to the Department of Justice, this arrangement potentially ran afoul of the federal Anti-Kickback Statute. The DOJ launched a False Claims Act investigation by issuing a subpoena to Astellas in 2016. Astellas subsequently paid $100 million, plus interest, to the U.S. government, and the settlement agreement specified that $50 million of that amount was restitution. Astellas then took a tax deduction for the amount paid in restitution, which, at a 21% tax rate, reduced its taxes by $10.5 million in 2019. Remember the deduction and savings – they become important in a minute.

When Astellas sought coverage, its excess insurer – Liberty Insurance Underwriters – denied coverage and sued for a declaratory judgment in Illinois state court. The parties agreed to bring cross-motions for summary judgment on discrete issues, and Astellas won across the board. (The trial court’s order makes for a great read on why attorney’s fees and costs incurred in responding to a governmental subpoena are covered under a private company directors and officers liability policy, but that is for another blog post.)

This focuses on Liberty’s position regarding the $50 million restitution payment. Liberty argued that the amount of that settlement payment could not reach its layer, which attached at $40.5 million. This is because, according to Liberty, Astellas’ $10.5 million in tax savings reduced Astellas’ net loss to $39.5 million, below Liberty’s attachment point. Liberty also contended that allowing coverage for the full amount would have been a prohibited “double recovery.”

The court rejected that argument. Liberty, the court found, had breached its obligation by failing to advance Astellas the settlement funds (the policy required Liberty to “pay on behalf of”). The insurer could not now take advantage of Astellas’ tax mitigation efforts. Moreover, Astellas did not “recover” $10.5 million – rather, it lowered its tax obligation. Thus, there was no “double recovery,” which would have been prohibited.

Both cases are good reminders that an insurer’s payment obligation will be construed according to the policy language. And an insured’s ability to reduce its losses does not automatically accrue to the insurer’s benefit.