ARTICLE 1 (FRENCH) (DO NOT DELETE) 5/22/16 9:34 PM THE INSURABILITY OF CLAIMS FOR RESTITUTION Christopher C. French* Does and should a wrongdoer’s liability insurance cover an aggrieved party’s claim for restitution (e.g., a claim for the disgorgement of ill-gotten gains)? This article answers those questions. It does so by first answering the question of whether claims for restitution are covered under the terms of liability insurance policies. Then, after concluding that they are, it addresses the question of whether claims for restitution should be insurable as a matter of public policy and insurance law theory. There are long- standing legal and equitable principles that, on the one hand, dictate that a wrongdoer should not be allowed to benefit from its wrongdoing, which the wrongdoer would if insurance were allowed to cover claims for restitution. On the other hand, there are competing public policies that favor enforcing contracts and compensating innocent victims. If a claim for restitution is covered by the terms of an insurance policy, but such claims are viewed as uninsurable as a matter of public policy, then policyholders would have paid millions of dollars in premiums for policies that provide illusory coverage and thousands of innocent victims with billions of dollars of claims would not receive compensation. In analyzing these issues, this article does so by using two common examples where the insurability of claims for restitution are regularly implicated—intellectual property infringement claims under Commercial General Liability insurance policies (CGL policies) and shareholder fraud claims under Directors and Officers liability insurance policies (D&O policies). * Christopher C. French is a Visiting Assistant Professor at Penn State Law; J.D., Harvard Law School; B.A., Columbia University. The author gratefully acknowledges the legal research contributions of Allison Fogg and Kyle Yeversky to this article. The author also would like to thank Aviva Abramosky, Tom Baker, Jay Feinman, Leo Martinez, Chaim Saiman, Peter Siegelman, Jeff Stempel, and the participants in workshops hosted by Indiana University Maurer School of Law, Louisiana State Law School, and Rutgers Law School for providing comments on earlier drafts of this article. 599 ARTICLE 1 (FRENCH) (DO NOT DELETE) 5/22/16 9:34 PM 600 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 18:3 INTRODUCTION ........................................................................................... 600 I. CLAIMS FOR RESTITUTION .................................................................. 606 A. The Theoretical Basis of Claims for Restitution ..................... 606 B. Intellectual Property Infringement Claims .............................. 608 C. Shareholder Claims .................................................................. 609 II. THE RELEVANT POLICY LANGUAGE .................................................. 612 A. “Damages” Covered by Commercial General Liability Policies ..................................................................................... 612 B. “Losses” and “Damages” Covered by D&O Policies .............. 614 III. A CONTRACTUAL ANALYSIS OF WHETHER CLAIMS FOR RESTITUTION ARE COVERED UNDER LIABILITY POLICIES ............. 616 A. Contra Proferentem .................................................................. 616 B. The “Reasonable Expectations” Doctrine ............................... 618 C. Application of the Rules of Policy Interpretation to the Issue ......................................................................................... 620 1. Analysis under CGL Policies ............................................. 620 2. Analysis under D&O Policies ............................................ 625 IV. PUBLIC POLICY CONSIDERATIONS ................................................... 628 A. Public Policy Arguments Against Allowing Insurance to Cover Claims for Restitution ................................................... 628 1. The Level 3 Case ............................................................... 629 2. The Bank of the West Case ................................................ 633 B. Public Policy Arguments in Favor of Allowing Insurance to Cover Claims for Restitution ............................................... 636 1. The Theoretical Foundation of the Public Policy against Allowing Insurance to Cover Claims for Restitution is Unsound ....................................................... 636 2. Competing Public Policies that Weigh in Favor of Allowing Insurance to Cover Claims for Restitution ........ 638 3. Insurance Is Already Allowed to Cover Numerous Types of Intentional Torts .................................................. 641 4. Insurance Already Is Allowed to Cover Punitive Damages ............................................................................. 644 5. State Legislatures Have Concluded Claims for Restitution Should Be Insurable ........................................ 646 CONCLUSION .............................................................................................. 648 INTRODUCTION In essence, a claim for restitution is a claim by one party to recover something from another party who has obtained it unlawfully (e.g., the ARTICLE 1 (FRENCH) (DO NOT DELETE) 5/22/16 9:34 PM 2016] THE INSURABILITY OF CLAIMS FOR RESTITUTION 601 party stole it).1 The guiding principle underlying claims for restitution is unjust enrichment.2 The party who unlawfully has taken something from the other party should be required to return it or pay for it as a matter of law or equity. Consequently, a common remedy in an unjust enrichment case is the disgorgement of the ill-gotten gains.3 But, what if the party who took the item no longer has it and cannot compensate the aggrieved party, which is the typical situation today because most people in America are judgment proof?4 Does and should the wrongdoer’s liability insurance cover the aggrieved party’s claim for restitution? This article answers these questions. To do so, one must first determine whether claims for restitution are covered under the terms of liability insurance policies. If they are, then one must determine whether claims for restitution are and should be insurable as a matter of public policy and insurance law theory. Answering these questions results in a clash of public policies that directly conflict. On the one hand, there are long-standing legal and equitable principles that dictate that a wrongdoer should not be allowed to benefit from its wrongdoing, which the wrongdoer would if insurance were allowed to cover claims for restitution. On the other hand, there are the competing public policies that favor enforcing contracts and compensating innocent victims. If a claim for restitution is covered by the terms of an insurance policy, but such claims are viewed as uninsurable as a matter of public policy, then insurers would receive windfalls in the form of millions of dollars of unearned premiums for policies that provide illusory coverage, and thousands of innocent victims would go uncompensated for losses that total billions of dollars.5 1. See Mark P. Gergen, What Renders Enrichment Unjust?, 79 TEX. L. REV. 1927, 1946 (2001) (describing that restitution can compensate for wealth someone acquires without consent). 2. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 1 cmt. a (2010); see also JOHN P. DAWSON, UNJUST ENRICHMENT: A COMPARATIVE ANALYSIS 42-63 (1951) (explaining the development of remedies for unjust enrichment, including restitution, through Roman Law). 3. See Emily Sherwin, Restitution and Equity: An Analysis of the Principle of Unjust Enrichment, 79 TEX. L. REV. 2083, 2089 (2001) (stating that the relinquishment of profits is one of the common types of restitution cases). 4. See, e.g., Stephen G. Gilles, The Judgment-Proof Society, 63 WASH. & LEE L. REV. 603 (2006) (discussing the reasons why judgments against most people are uncollectible); Kyle D. Logue, Solving the Judgment-Proof Problem, 72 TEX. L. REV. 1375 (1994) (discussing the impact insurance has on the judgment proof problem); S. Shavell, The Judgment Proof Problem, 6 INT’L REV. L. & ECON. 45 (1986) (analyzing the problems that result from judgment proof individuals). 5. There were 210 shareholder fraud cases filed in 2008, for example, with the median amount of damages sought being $340 million. See, e.g., TOM BAKER & SEAN J. GRIFFITH, ENSURING CORPORATE MISCONDUCT: HOW LIABILITY INSURANCE UNDERMINES SHAREHOLDER LITIGATION 3, 4, 142 (2010) (stating that in 2008 the number of shareholder ARTICLE 1 (FRENCH) (DO NOT DELETE) 5/22/16 9:34 PM 602 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 18:3 To help frame the discussion, consider two scenarios that commonly occur where the issue of the insurability of claims for restitution arises. Scenario One: a company, the policyholder, purchases a Commercial General Liability (“CGL”) policy to cover it against any liabilities that may arise as a result of its business operations. One of the products the policyholder sells has a brand name similar to one of the policyholder’s competitors. The competitor subsequently sues the policyholder, alleging that the name of the policyholder’s product infringes the competitor’s trademark. For relief, the competitor seeks to disgorge the policyholder of all of the profits the policyholder allegedly made from the allegedly infringing product, which totals millions of dollars. When the policyholder tenders the claim to its CGL insurer, the insurer denies coverage