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You are here: Home / Damage/Loss / 7th Cir. Holds Insurance Coverage Applies to Settlement Payments for Alleged Anti-Kickback and False Claims Act Violations

7th Cir. Holds Insurance Coverage Applies to Settlement Payments for Alleged Anti-Kickback and False Claims Act Violations

June 2, 2023 by Matthew Lewis

On May 3, 2023, the Seventh Circuit Court of Appeals, in Astellas US Holding Inc. v. Federal Insurance Co., held that a liability insurer was required to contribute its limits toward its insured’s payment to settle potential anti-kickback claims because the insurer did not show that such amounts were uninsurable restitution.

Astellas, a Japanese drugmaker, launched a drug to treat metastatic prostate cancer in 2012. Astellas priced the treatment at $7,800 per month, with Medicare to cover approximately $6,000 of the total amount. With the launch of its new drug, Astellas also began to contribute to two patient assistance plans, which were set up to help patients needing the type of drug offered by Astellas.

In 2017, the Department of Justice issued a civil investigative demand to Astellas regarding possible violations of the False Claims Act, the Anti-Kickback Statute, and the criminal health care fraud provision of the Health Insurance Portability and Accountability Act concerning Astellas’ contributions to the patient assistance plans. Astellas and the DOJ avoided litigation by agreeing to a settlement of $100 million in April 2019. Significantly, for tax purposes, $50 million of the total settlement amount was labeled as “restitution to the United States.”

Federal Insurance Co. was one of several liability insurers of Astellas, which provided a directors and officers excess liability policy for $10 million. Federal denied coverage because the policy did not cover payments for “restitution” as opposed to “compensatory” losses. More specifically, the policy contained two exclusions for “final adjudications” when such claims involve improper or illegal remuneration, or claims involving deliberate fraudulent acts. Federal also argued that under Illinois state law, “restitutionary” payments were uninsurable and against public policy because of the “acute moral hazard that the insurance creates.”

Astellas sued Federal and sought declaratory relief from the U.S. District Court in Illinois, arguing that the policy covered the settlement. Both parties filed competing motions for summary judgment. The district court ultimately granted Astella’s motion for summary judgment, ruling that Federal failed to show that the settlement amount was an uninsurable loss under either the subject policy or Illinois law.

The Seventh Circuit agreed with Astellas and the lower court. With regard to the policy exclusions raised by Federal, the court noted that Illinois law required a narrow interpretation of exclusions. According to the court, the exclusions did not apply because there was no “final adjudication” of the matter, only settlement.

With regard to the policy’s exclusion for “deliberate fraudulent acts,” the Seventh Circuit found that Federal did not meet its burden of supporting an inference that Astellas would have been liable for fraudulent acts if litigated. The court did acknowledge such a burden was difficult for Federal to meet because there was no litigation and thus little evidence available to Federal to support its position. Nevertheless, the court held that the evidence available was contrary to Federal’s position, as the evidence did not support the element of scienter required for fraud.

As to whether the settlement amounts were uninsurable under Illinois law, the Seventh Circuit noted the fine distinction between uninsurable restitutionary payments and insurable compensatory payments. According to the court, the main distinction between the two types of payments is that a restitutionary payment is one that “disgorges” something that does not belong of right to a defendant, but to the plaintiff, and the restitution payment seeks to deprive the defendant of the net benefit of an unlawful act.

Regarding whether the settlement was restitutionary, the Seventh Circuit rejected Federal’s argument that the classification as restitution for tax purposes in the settlement agreement was evidence of an uninsured restitution payment. The court noted that since the passage of the Tax Cuts and Jobs Act of 2017, such language was used in settlement agreements between parties and the U.S. government as a standard practice for tax purposes. Accordingly, the Seventh Circuit held that the “label” of a restitution payment in the settlement agreement was not probative of Illinois public policy on moral hazard and insurability, but instead was only there for tax purposes.

Finally, the Seventh Circuit analyzed whether the potential claims under the Anti-Kickback Statute and False Claims Act would have required Astellas to pay restitution to the United States for “ill-gotten gains” or “disgorgement” of profits. The court rejected Federal’s position that the settlement amount was inherently restitutionary. Instead, the court explained how the False Claims Act’s remedial scheme did not depend on whether Astellas had any profits or gains, but instead was devised to make the government whole. Specifically, the calculation of damages under the act only considered the government’s losses — not Astellas’ gains. During settlement negotiations between Astellas and the DOJ, the DOJ based its damages estimates on the number of Medicare subsidies paid on behalf of patients in the assistance funds, not the profits made by Astellas for its contributions to those funds. As such, the court held there was no evidence in the record that the settlement amount was based on profits made by Astellas through the funds. Thus, the court concluded that the settlement amount was not “restitutionary” and was insurable under Illinois law.

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About Matthew Lewis

Matthew E. Lewis is an associate at Carlton Fields in Orlando.

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