7th Circuit: D&O Insurer Must Pay Settlement for Drugmaker’s Kickback Case

Federal Insurance Co. must pay the $10 million policy limit in a directors and officers policy issued to Astellas Pharma, despite the carrier’s assertion that Illinois public policy forbids it from reimbursing the drugmaker for the cost of settling allegations that it violated anti-kickback laws, a federal appellate panel ruled.

The 7th Circuit Court of Appeals affirmed a decision by the US District Court that the $100 million payment to resolve a Justice Department investigation was covered by the D&O policy and public policy did not bar payment.

The appellate panel said the policy included “settlements” as a type of covered loss. The fact that the policy excluded losses caused by deliberate fraud or illegal renumeration only if there were “final adjudication” shows that Federal intended to cover the settlement payment, the opinion says.

“In essence, the ‘final adjudication’ exclusions show that Federal wrote the policy to extend coverage to the limits of applicable law and public policy. Federal was willing to extend coverage, if permissible, to settlements even for claims for deliberate fraud and willful violations of the law, so long as there was no final adjudication,” the opinion says.

In 2012 Astellas launched Xtandi, an androgen receptor inhibitor that is used to treat metastatic prostate cancer. The company charges $7,800 for a month’s supply of the drug, making it unaffordable to many Medicare recipients because the government covers only $6,000 of that cost.

Astellas attracted the attention of federal prosecutors after it began making payments to charities that help patients pay for drugs needed to treat chronic diseases. Astellas encouraged two organizations, the Chronic Disease Fund and Patient Network Foundation, to create special funds that would provide patient assistance only for androgen receptor inhibitors such as Xtandi. Astellas donated $27 million to the funds in 2013.

Government officials had cautioned that patient assistance funds that are structured too narrowly may risk running afoul of the Anti-Kickback Statute and False Claims Act. The Justice Department began investigating Astellas because its contributions to the patient assistance plans could be used to reward doctors and patients for choosing particular drugs.

A marketing executive admitted that he expected the donations to benefit Astellas, but the primary purpose was “charitable.”

Astellas authorized its attorneys to begin settlement negotiations with the Justice Department in 2018. A year later, the company agreed to pay the government $100 million, of which $50 million was labeled as “restitution to the United States.”

Astellas asked Federal and its other liability insurers to cover portions of the settlement, but the insurers denied the claim. Astellas filed a lawsuit alleging breach of contract.

Federal filed a motion for summary judgment, arguing that the settlement cannot be insured because it was restitution, meaning a payment to a victim of intentional wrongdoing. The District Court did not agree and ruled in favor of Astellas. The insurer appealed.

The 7th Circuit panel said the “final adjudication” language in the policy’s exclusions show that Federal intended to stretch its liability coverage as far as the law would allow. The panel said while half of settlement was labeled as “restitution,” that was done only for tax purposes and the other half of the $100 million payment was not affected.

The opinion says payments made to compensate a victim for a loss are “compensatory” and insurable. On the other hand, a payment made to disgorge fraudulently obtained profits is restitution, which is not insurable.

The court said discerning the difference between the two types of payments can be tricky. Deciding whether the Astellas settlement was restitution is even more difficult because the government never filed a formal complaint. The settlement released Astellas from “any civil or administrative monetary claim” the government may have.

The panel said Illinois appellate courts have held that insurers cannot deny claims merely because fraud is suspected. Federal was required to show that the payment was not even potentially covered.

“Even in cases where settlement payments unquestionably included some restitution, Illinois courts have given the benefit of the doubt to the insureds,” the opinion says.

Topics Carriers Illinois