News & Events

Skarzynski Black Wins Ruling on Disgorgement

March 29, 2017
Skarzynski Black won a declaratory judgment in favor of the Twin City Fire Insurance Company (“Twin City”), which determined that the D&O policy in issue did not cover any settlement payments to the extent they are in the nature of disgorgement.   The March 2017 ruling by the U.S. District Court for the Southern District of Texas held that, to the extent any settlement of the underlying Delaware derivative action constitutes disgorgement, it “is uninsurable as a matter of Texas law and is not covered by the Policy.”
 
The case arose when the directors of the insured publicly-traded corporation were accused in a shareholder derivative action of having paid themselves directors fees several times those paid by comparable companies.   The directors then reduced their compensation, and admitted in public filings that the reduction might be viewed as a reaction to the suit.  The directors demanded that their D&O carrier agree to fund a possible settlement of the derivative action, which would result in the insurer paying back the excess compensation to the corporation on behalf of the directors.  Twin City initiated the federal action seeking a declaratory judgment that any return of the directors’ fees would be a restitutionary remedy in the nature of disgorgement and, therefore, not covered by the policy.   The company and the directors, however, argued that language requiring a “final adjudication” in the policy’s exclusion of damages from any amounts relating to or arising out of any insured’s personal profit, meant that any repayment of the director’s fees via settlement (as opposed to an adverse judgment) was covered.    The parties filed cross-motions for judgment on the legal issue.   
 
U.S. Magistrate Judge Johnson issued a February 28, 2017 recommendation that disgorgement is uninsurable and that repayment of the fees “ [did] not constitute a covered loss under the Policy.”  With respect to the final adjudication trigger for the personal profit exclusion, the judge held that it could not create coverage that was not otherwise provided by the policy, saying that “neither an exclusion nor an exception can create coverage.”  The judge also rejected the argument that the exclusion would be rendered superfluous if disgorgement were held uninsured.  On March 29, District Judge Gray Miller issued an Opinion and Order (available here) rejecting all of the insureds’ objections to the Magistrate Judge’s Recommendation and adopting it “IN FULL.”
 
 
The Case is captioned: Twin City Fire Ins. Co. v. Oceaneerring International, Inc., No-H-16-666 (S.D. Tx).
 
For more information contact
John Black
James Sandnes
George Mustes