A coverage defense that insurers frequently raise is the assertion that the amount for which the insurance payment is sought represents uninsurable disgorgement. Beyond the more general question of whether or not disgorgements are or are not insurable is the more specific question of whether or not the amount for which coverage sought represents disgorgement. In an interesting July 30, 2018 opinion in a case involving the investment firm TIAA-CREF, the Delaware Supreme Court, applying New York law, rejected the firm’s insurer’s argument that the amount the firm paid in settlement of three underlying class action lawsuits represented uninsurable disgorgement. The Court expressly distinguished a series of three decisions in which New York courts had ruled that settlement amounts paid in settlement of regulatory enforcement actions represented uninsurable disgorgement. The Delaware Supreme Court’s July 30, 2018 order can be found here.



TIAA-CREF provides retirement accounts and other financial services to employees of schools and colleges. The organization was sued in three separate class action lawsuits which alleged that it had improperly failed to credit the accounts of customers with investment gains that accrued while transfer or withdrawal requests were being processed. The class action lawsuits ultimately were settled with amounts to be paid to the members of the class according to formulas in the settlement documents. The settlement documents expressly recited that in entering the settlement, TIAA-CREF was resolving disputed claims, denied all allegations of wrongdoing, and was not admitting any liability.


TIAA-CREF sought coverage for the settlement amounts from the various carriers in its professional liability insurance program. The carriers denied coverage for the amounts on various grounds, including their contention that the amounts the organization agreed to pay in settlement of the underlying claims represented uninsurable disgorgement. TIAA-CREF filed a coverage action against the insurers in Delaware Superior Court. The parties filed cross-motions for summary judgment.


As discussed here, in October 2016, the Superior Court judge granted TIAA-CREF’s summary judgment motion on the disgorgement issue, holding that the settlement amounts did not represent uninsurable disgorgement. The case ultimately went to trial on remaining issues. Following entry of a jury verdict in which the jury largely ruled in favor of TIAA-CREF and against the insurers, the parties filed cross-appeals on a variety of issues. Among other things, the insurers appealed the Superior Court judge’s ruling on the disgorgement issues.


The July 30, 2018 Order

In a July 30, 2018 order written by Justice James T. Vaughn, Jr. for a five-judge panel, the Delaware Supreme Court, among other things, affirmed the Superior Court judge’s ruling on the disgorgement issue.


In ruling on the disgorgement issue, the Court considered the New York cases on which the insurers relied to argue that the underlying settlement represented uninsurable disgorgement. The cases, the Court said, “involve regulatory proceedings which resulted in settlements ordering the insured to pay disgorgement damages.” New York public policy, the Court noted, prohibits enforcement of insurance contracts “in cases involving disgorgement where the payment is conclusively linked, in some fashion, to improperly acquired funds in the hands of the insured.”


In this case, by contrast, TIAA-CREF disputed the claims and consistently took the position that its procedures were proper and lawful. There was no finding that the funds in dispute represented ill-gotten gains. The order processing arrangement at the heart of the underlying dispute spread all of the gains and losses arising during order processing to all investors and did not create an opportunity for TIAA-CREF to profit. The Court concluded that the Superior Court was correct in distinguishing the New York cases on which the insurers sought to rely, as those cases apply to “situations in which the insured’s wrongdoing resulted in ill-gotten gains,” based on public policy principle that “does not apply to the facts of this case.”


The Court’s compact opinion also addresses a number of other interesting issues, including the interpretation of an excess carrier’s shaving of limits endorsement, as well as issues surrounding the reasonableness of the defense fees incurred in the underlying case.



It is worth emphasizing that neither the Superior Court judge nor the Supreme Court held that the policies at issue would cover amounts paid as disgorgement. Neither court rejected the underlying principle on which the insurers sought to rely, that as a matter of public policy under New York law amounts paid as disgorgement are uninsurable. Rather, the trial court and the appellate court held only that the amounts TIAA-CREF paid in settlements do not represent disgorgement.


In concluding that the settlement amounts do not represent uninsurable disgorgement, both the trial court and the Supreme Court relied heavily on the fact that the settlement amounts did not represent the return of ill-gotten gains. Indeed to the contrary, as the Supreme Court noted, under the order processing procedure at issue in the underlying case, TIAA-CREF did not have an opportunity to profit at the investors’ expense.


The Court’s holding represent the proposition that the payment of funds only represents a disgorgement of the funds represent ill-gotten gains or improper profits at others’ expense. In reaching its conclusion the Supreme Court noted that there had been no finding that the funds in dispute in the underlying case represented ill-gotten gains, nor could one have been made. This line of analysis suggests that other policyholders opposing an insurer’s argument that amount for which insurance is sought represents disgorgement should argue that the funds in dispute do not represent ill-gotten gains or improper profits.


I have long felt that if insurers are going to argue that disgorgement amounts are uninsurable, then the meaning of the term disgorgement should be construed and applied as narrowly as possible, and the preclusive effect of the uninsurability principle should only be applied when the amounts involved clearly and unequivocally involve the return of ill-gotten gains.


The nature of the amounts paid and for which coverage is sought frequently arises when the insurer seeks to disclaim coverage on the grounds that the amounts represent uninsurable disgorgement. For discussion of a case in which a court concluded that amounts paid in settlement do represent uninsurable disgorgement because of the nature of the underlying claims, refer here.