The Ninth Circuit, applying California law, has held that there is no coverage under a D&O policy for an arbitration award comprised of funds previously loaned to the insured by the claimant because the award constituted uninsurable restitution. Tandem Fund II, L.P. v. Scottsdale Ins. Co., 2025 WL 2206112 (9th Cir. Aug. 4, 2025).
A venture capital firm provided loans to a start-up company specializing in jewelry containing location-transmitting software. The firm relied on the start-up’s supply contract with a major jewelry wholesaler; unbeknown to the firm, the supply contract had been terminated. After the start-up failed and the loans went unpaid, the firm initiated arbitration against the start-up and its CEO. The arbitration panel ruled unanimously in favor of the firm and awarded as damages the full amount of the loan advances, holding the start-up and its CEO jointly and severally liable. The firm then obtained the start-up’s rights under its D&O Policy and filed suit against the insurer, alleging that the insurer had breached the policy by failing to pay the arbitral award. The district court dismissed the complaint, holding that the restitutionary arbitral award was not insurable under California law.
The Ninth Circuit affirmed on appeal. The court noted that the policy’s definition of “Loss” carved out “matters uninsurable” under California law and cited California Supreme Court precedent holding that the “public policy exclusion for restitutionary relief” bars coverage in “situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired.” The court reasoned that, when the arbitration panel awarded damages in the amount of the previously advanced loans, the start-up and its CEO were being asked to return something wrongfully received, which is a restitutionary rather than compensatory remedy. The court noted that “labels such as ‘damages,’ and the absence of labels such as ‘return,’ are not controlling.”
The court rejected the firm’s arguments that coverage for the CEO is available because she did not receive the loan proceeds and that the arbitral award did not “restore” funds because the loan proceeds were completely dissipated. The court reasoned that those arguments would undermine the public policy rationale for the uninsurability rule of preventing the wrongdoer from transferring the cost of disgorgement to an insurer. The court noted that California’s uninsurability rule does not require the insured to be capable of restoring funds to the claimant, only that the insured has been ordered to do so.
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