‘Loss’ Within Meaning of Insurance Contract Does Not Include Restitution of Ill-Gotten Gains
Insurance Law Update
In CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co., __ F.3d __, 2008 WL 3823898 (11th Cir. August 18, 2008), the 11th U.S. Circuit Court of Appeals affirmed that the return of money received through a violation of law, even if the actions of the recipient are innocent, constitutes a restitutionary payment, not a covered “loss.”
Shareholders of CNL brought suit against the company seeking a refund to compensate them for the difference between the price they had paid for the stock and the price at which the company’s stock had been valued before a proposed merger. The shareholders relied on Section 11 of the Securities Act of 1933. CNL reached a settlement with the shareholders and then sought reimbursement for its expenses related to this litigation from its directors and officers’ liability policies.
The court found that the payment was not a “loss” covered by the policies because the payment to the shareholders was restitutionary in nature; CNL had simply returned money that it had acquired in violation of Section 11. CNL did not dispute that the payment to the shareholders was the return of money that it had acquired in violation of Section 11. Instead, it argued that, under Section 11, damages can never be restitutionary. The court, however, found that Section 11 does not preclude restitutionary relief.