Connecticut Court Holds Restitutionary Settlement Not Insurable Loss

The Superior Court of Connecticut, applying Connecticut law, granted an insurer’s motion for summary judgment, finding that a D&O policy did not afford coverage for a settlement that resulted in a consent judgment against the insureds. Ghio v. Liberty Ins. Underwriters Co., 2024 WL 3949196 (Conn. Super. Ct. Aug. 23, 2024). The court held that the settlement was restitutionary in nature and therefore was not insurable.

A multimedia lifestyle and entertainment network for golf fans actively encouraged investment in the company. The company allegedly failed to disclose to investors that it was undercapitalized and required millions of dollars to make it viable. Two investors who bought stock in the company four times between 2012 and 2014 filed suit against the company and certain of its directors and officers alleging failure to disclose and material misrepresentation in connection with the investments. The company tendered the suit to its D&O insurer, which defended the insured, subject to a reservation of rights. As the insurer noted in its reservation of rights letter, the policy’s definition of Loss did not include “matters uninsurable under the law pursuant to which the Policy is construed.” With the investors’ lawsuit about to go to trial, the insurer sent a letter advising the insureds that a judgment would not be covered. The insureds and the investors entered into a settlement whereby the insureds stipulated to a judgment against them and assigned their rights under the D&O policy to the investors, who agreed not to seek satisfaction of the judgment from the insureds.

In the ensuing coverage litigation, the court granted the insurer’s motion for summary judgment. Although there was no Connecticut law directly on point, the court found persuasive cases from other jurisdictions holding that the restoration of an ill-gotten gain is not an insurable loss under a D&O insurance policy. The court noted that the amount of the stipulated judgment represented the amount that the investors purportedly invested in the company, which the court found to be restitutionary in nature and thus not insurable as a matter of law.