One of the perennial D&O insurance issues involves the question whether “disgorgement” amounts awarded in SEC proceedings represent “penalties” for which insurance coverage is precluded. In the latest example of a case involving these issues, the Delaware Superior Court recently held, in reliance on the statutory provisions defining the SEC’s authority to seek monetary remedies, that the disgorgement amounts and prejudgment interest awarded against the media company Clear Channel are not “penalties” for which coverage is precluded. As discussed below, the court’s analysis of the issues, and its reference to the relevant statutory provisions, is both detailed and instructive.

The Delaware Superior Court’s April 28, 2026, opinion in the case can be found here. A May 1, 2026, LinkedIn post about the Clear Channel decision by Geoff Fehling of the Hunton Andrews Kurth law firm can be found here.

Background

In January 2018, Clear Channel became aware of financial improprieties at a Chinese subsidiary. Clear Channel voluntarily disclosed what it then knew of the situation to the SEC. The SEC commenced an investigation. After several years of investigation, the SEC and Clear Channel engaged in negotiations to try to resolve the matter.

On September 28, 2023, the SEC entered, pursuant to the negotiated resolution with Clear Channel, a Cease-and-Desist Order. Among other things, the Order required Clear Channel to “pay disgorgement” of approximately $16.3 million, prejudgment interest of approximately $3.7 million, and a “civil money penalty” of $6 million.

Clear Channel had sought to have its D&O insurer pay defense costs incurred in responding to the SEC’s investigation. Following the entry of the Cease-and-Desist Order, Clear Channel sought indemnification for the disgorgement and prejudgment interest amounts, but not for the civil money penalty. The insurer took the position that neither the disgorgement amount nor the associated prejudgment interest constituted covered Loss under the policy and that the payment of insurance for these amounts would also be contrary to public policy.

Clear Channel commenced coverage litigation against the insurer, seeking coverage for the disgorgement amount and the prejudgment interest. The parties filed cross-motions for summary judgment.

Relevant Policy Language

The policy’s definition of the term “Loss” provided that Loss “shall not include … civil or criminal fines or penalties imposed by law” [a provision that the court referred to as the Civil Penalties Exclusion] or “matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed” [a provision that the court referred to as the Uninsurability Exclusion].

The April 28, 2026, Opinion

In a detailed April 28, 2026, opinion, Delaware Superior Court Judge Patricia Winston, applying Delaware law, granted Clear Channel’s summary judgment motion and denied the insurer’s summary judgment motion. In granting Clear Channel’s motion, Judge Winston rejected the insurer’s argument that the disgorgement was a “penalty” for which the policy precluded coverage and also rejected the insurer’s argument that the disgorgement amount was uninsurable as a matter of public policy, and held that “the insurance contract provides coverage for the disgorgement and prejudgment interest amounts in the SEC settlement.”  

The insurer had tried to argue that the disgorgement amount, like the civil money penalty amount awarded in the Cease-and-Desist Order, represented “penalties” within the meaning of the Civil Penalties Exclusion in the definition of Loss, and urged the court to “look past the label.”  In rejecting this argument, the court considered the SEC’s statutory authority for seeking monetary remedies, noting that the relevant statutory language “delineates” between civil penalties on the one hand, and “equitable relief” and “disgorgement” on the other hand. Judge Winston said that that the policy’s definition of Loss “mirrors” this distinction. The policy’s definition of Loss, like the relevant statutory provisions, expressly references “penalties” but not “equitable relief” or “disgorgement.”

The “most natural reading” then, the court said, is to conclude that “the Civil Penalties Exclusion concerns the remedy the securities laws call a “civil penalty,” and “not the other remedy that the exclusion does not reference.” This reading, the court said, gives the provision’s words their “plain and ordinary meaning” and properly considers the “securities regulation context.” 

The insurer sought to try to refute this reading of the policy by referring to dictionary definitions of the word “penalty.” Although the court acknowledged that dictionary definitions can assist in interpreting contract terms, the court noted in this case that the policy provision does not refer to “penalties” in general, but rather “civil or criminal … penalties imposed by law.” The relevant law here is the SEC’s statutory authority for awarding monetary penalties, in the context of which “civil penalties” has a particular meaning distinct from disgorgement, and “that meaning is of greatest import here.” The court declined to assign the word “penalty” a meaning based on “dictionary and non-securities law definitions” as that required “plucking” the word from its surrounding policy language and legal context.

The insurer further relied on two Supreme Court decisions – the 2017 Kokesh decision (about which refer here) and the 2020 Liu decision (about which refer here) – for the proposition that “disgorgement” is a “penalty” within the meaning of the securities laws. While those cases did conclude that “disgorgement” was a “penalty” within the meaning of relevant statute of limitations provisions, the U.S. Supreme Court expressly cautioned that “its ruling should not be read to address matters beyond the sole question in the case” having to do with the relevant limitations period.

Judge Winston also referenced the New York Court of Appeals’ 2021 decision in the J.P. Morgan/Bear Stearns case (about which refer here), in which the New York court rejected the insurer’s argument in that case, made in reliance on Kokesh, that “disgorgement” is a “penalty.” Judge Winters cited with approval to the New York court’s holding that Kokesh does not control because the court in Kokesh “was not interpreting the term ‘penalty’ in an insurance contract” and that “the meaning of that term may vary based on context.” With express reference to the New York court’s opinion, Judge Winters also concluded that the U.S. Supreme Court’s opinions in Kokesh and Liu do not control the insurance coverage issue here.

Judge Winston concluded that the Civil Penalties Exclusion “unambiguously excludes SEC civil monetary penalties but not SEC disgorgement or prejudgment interest paid in settlement.”

Finally, Judge Winston also rejected the insurer’s argument that coverage for the disgorgement amount and the prejudgment interest is “uninsurable as a matter of public policy.” She concluded that “there is no clear Delaware public policy, from the General Assembly or otherwise, so strong as to vitiate the parties’ freedom of contract.” The insurer, she said, “cannot escape its contract on public policy grounds.”

Discussion

In numerous prior posts on this site, I have commented (here, for example) that the Delaware Superior Court is a particularly friendly forum for policyholders. It would be tempting, therefore, for me to try to explain the court’s decision in the Clear Channel case as just one more example of the court’s apparent proclivity to side with policyholders in insurance coverage disputes.

Although I continue to view the Delaware Superior Court as generally favorable to policyholders, I don’t think this generalization explains the court’s decision here. I don’t think the court’s decision here can be understood as yet another example of this court’s policyholder proclivity.

The court’s reasoning here about whether or not “disgorgement” is a “penalty,” and therefore precluded from coverage, is based on the language of the statutory provisions authorizing the monetary remedies the SEC may seek. The court found a distinction in the statutory language between “penalties” on the one hand and “disgorgement” on the other, and, more importantly for purposes of the issues in dispute here, the court found further that the words used in the relevant policy provision “mirror” those securities law statutes. Both the statute and the policy provision, the court said, “delineate” between penalties on the one hand and disgorgement on the other.

In other words, the court’s decision is grounded in the relevant statutory provisions and corresponding policy language. Moreover, this connection to the relevant statutory provisions was sufficient for the court to reject the insurer’s attempt to rely on seemingly contradictory dictionary definitions of the term “penalties.”

I was also struck by the fact that the court not only rejected the insurer’s attempt to rely on the U.S. Supreme Court’s Kokesh and Liu decisions – for the proposition that “disgorgement” is a “penalty” – but that the court did so in express reliance on the New York Court of Appeals’ holding in the J.P. Morgan/Bear Stearns case. Readers of this blog know that New York is, arguably by contrast to Delaware, not necessarily a policyholder friendly jurisdiction. (Though to be sure, even at the time, I noted that the New York highest court’s decision in the J.P. Morgan/Bear Stearns case was uncharacteristically policyholder friendly.) At a minimum, the court’s reliance on the New York court’s decision reinforces the view that the court’s decision in this case is grounded in relevant authority.

The Delaware court’s decision here is by no means the final word on these issues about “disgorgement.” For starters, the insurer here is free to appeal and undoubtedly will. There could be more of the “disgorgement” story to be told, even just in this case.

But more to the point, the question of whether or not “disgorgement” amounts are insurable are long-running and almost certainly will continue. I do wonder sometimes why insurers, if they really are so convinced that their policies should not cover disgorgement amounts, don’t just go ahead and say so in their policies. It could be that they just don’t want to undercut their arguments in many pending cases, involving language lacking any reference to disgorgement, in which the insurers are trying to argue that coverage for disgorgement is precluded. It may also be that in the current competitive market, it would be hard to sell a policy wording change that would be universally viewed as coverage restrictive.

In the absence of changes to the standard wording, disputes about whether or not D&O insurance policies provide coverage for disgorgement will continue. I suspect that in the future policyholders seeking coverage for disgorgement amounts will try to marshal the arguments that were successful here – that is, that the relevant statutory authority allowing the SEC to seek monetary remedies draws a distinction between “penalties” on the one hand, and disgorgement on the other hand, and that the relevant policy language “mirrors” this distinction.