Most people expect the SBA & DOJ to engage in a robust enforcement effort when it comes to the PPP program. A recent D&O Diary guest blog by Pillsbury’s Peter Gillon addresses potential coverage issues under D&O policies that may be implicated by enforcement activities addressing loan certifications. This excerpt discusses the potential coverage for repayments of PPP loans:
A policyholder facing a PPP investigative or enforcement action might choose or be forced to repay the loan principal and would obviously like to claim this under its D&O policy. An insurer would likely argue that such amounts constituted disgorgement of “ill-gotten gains,” and deny coverage. Depending on applicable state law and the policy language, such an exclusion may or may not apply to preclude coverage for both the repayment of loan principal as well as defense costs.
For example, standard policy language defines covered “Loss” as “damages, judgments, settlements” and the cost of defense, but excludes amounts that are uninsurable as a matter of law. Carriers argue that, although they define the scope of what is covered Loss using broad undefined terms—“damages,” “judgments” and “settlements”—“public policy” prohibits them from indemnifying an insured for payment of restitution or disgorgement of ill-gotten gains. Insurers often assert this defense even when no case or statute declares such payments uninsurable.
However, Courts interpreting Delaware law (which for reasons beyond the scope of this piece generally applies to Delaware corporations) have rejected insurers’ attempts to deny coverage on this basis, holding that an insurer must meet its burden to prove that the personal conduct exclusion applies, including establishing by final adjudication that the gains were ill-gotten, before it can deny coverage on the basis that restitution is “uninsurable.”
Other issues addressed by the blog include those relating to coverage for governmental audits and internal investigations, criminal and civil penalties, entity and individual coverage, and the implications of the presence or absence of scienter on the availability of coverage.
-John Jenkins, TheCorporateCounsel.net June 4, 2020
