Settlement Payments for Allegations of Fraud Insurable under Excess Policy

The United States District Court for the Northern District of Illinois, in an opinion written by Judge Valderrama, applying Illinois law, granted the insureds’, Astellas US Holding, Inc. and Astellas US Pharma, Inc. (collectively “Astellas”), motion for summary judgment against their excess insurer, Federal Insurance Company (“Federal”), holding that Federal must cover the amount of a settlement agreement Astellas entered into with the United States Department of Justice (“DOJ”) regarding an underlying illegal kickback allegation.

In 2016, the DOJ notified Astellas that it was under investigation for potential violations of the Anti-Kickback Statute, which prohibits pharmaceutical companies from paying or offering to pay, directly or indirectly, any renumeration to induce Medicare beneficiaries to purchase that company’s drugs. Specifically at issue were Astellas’ donations to a third-party charity assistance fund that would make it easier for consumers to afford the co-pays for prescriptions to Xtandi, a drug produced by Astellas. Without admitting wrongdoing or liability, Astellas agreed to a settlement agreement with the DOJ for $100 million, plus interest.

Federal issued an excess policy with a $10 million limit in liability in excess of $10 million in underlying coverage. Federal argued that payment of the Settlement Agreement did not constitute a covered loss under the Federal policy, as Astellas is not entitled to recover “ill-gotten gains,” or funds to which it was never entitled. The two parties disputed whether the settlement payment “constituted a damages payment to compensate the Government for a loss or injury done to it, as Astellas advocates, or, instead, was intended to divest Astellas of the net benefit it received as a result of its alleged wrongdoing, as Federal argues,” a distinction recognized by Illinois law.

The District Court agreed with Astellas’ argument that the settlement agreement was intended to compensate the government for losses incurred in Medicare payments paid as a result of Astellas’ alleged kickback, and it rejected Federal’s argument that it was intended to disgorge from Astellas the unjust profits it may have earned.  The District Court pointed to the settlement agreement’s own language that the sum was derived from “tainted” prescriptions paid by Medicare, rather than any calculation of the profit Astellas may have received from its actions.

Moreover, the District Court rejected Federal’s argument that coverage would contravene public policy, instead siding with Astellas and finding that an articulated interest in the freedom to contract by Illinois courts outweighed any interest, unsupported by any Illinois caselaw, in precluding coverage for allegations of fraud that settled before final adjudication. Even though the Federal policy contained a Final Adjudication Exclusion, excluding coverage for any loss arising out of a deliberate fraudulent act if a final non-appealable adjudication establishes that such an act occurred, the District Court inferred that the policy covered allegations of such an act, if settled prior to a final adjudication. The District Court emphasized the right of sophisticated parties to enter into insurance contracts, and, thus, found the loss insurable.

As a result, the District Court held that the settlement payment by Astellas to the DOJ was insurable as a loss under the Federal policy, and it granted Astellas’ motion for summary judgment. Astellas US Holding, Inc. v. Starr Indem. & Liab. Co., 17-CV-08220, 2021 WL 4711503 (N.D. Ill. Oct. 8, 2021).