Claims under Illinois False Claims Act Not Uninsurable under Illinois Law

The Northern District of Illinois has held that claims brought under the Illinois False Claims Act (“IFCA”) are not uninsurable as a matter of Illinois law.  Call One Inc. v. Berkley Ins. Co., 2022 WL 580802 (N.D. Ill. Feb 25, 2022).

The insured, a telecommunications company with $2 million in corporate indemnification coverage, was subpoenaed under the IFCA for failing to collect and remit taxes and fees to the state.  The insurer covered costs related to the defense of the subpoena, but asserted that it had no duty to defend or indemnify an IFCA complaint filed under seal, and refused to consent to independent counsel or to participate in settlement negotiations.  The insured settled the IFCA claim for $2.5 million and then sued the insurer.  The insured alleged that the insurer breached its duty to defend and indemnify the insured, and asserted a claim under Section 155 of the Illinois Insurance Code for unreasonably and vexatiously denying coverage.

The insurer moved to dismiss.  First, the insurer argued that a claim brought under the IFCA is uninsurable as a matter of public policy because the claim seeks civil penalties that operate like punitive damages.  The court disagreed, holding that the statute authorizes dual relief in the form of both damages and penalties.

Second, the insurer argued that relief sought under the IFCA constituted disgorgement, as the exclusion of taxes was part of the insured’s scheme to lower prices and appear more competitive, and therefore uninsurable as a matter of public policy under Illinois law.  The court disagreed again, reasoning that the IFCA complaint sought relief in the form of compensation for the State’s loss, not disgorgement of the insured’s ill-gotten profits.  Further, the court determined that the IFCA and other false claims actions authorize compensatory relief, and not disgorgement.

Finally, the court disagreed with the insurer’s argument that all false claims actions under the IFCA are uninsurable because allowing a company to insure against its own wrongdoing would give rise to moral hazard.  The court held that there was no evidence in the pleadings that the insured had profited on its wrongdoing, because it failed to collect the taxes as well as remit them to the state.

The court also declined to dismiss the insured’s claim for bad faith denial of coverage, holding that the insured had asserted enough specific facts of acts deemed “vexatious” that it survived the pleading standard.