Call One Inc v. Berkley Insurance Company, 587 F.Supp.3d 706

Background

Call One, a telecom company, received an Office of the Illinois Attorney General (OAG) subpoena under the Illinois False Claims Act (IFCA) in March 2019 and tendered the matter to its Berkley directors-and-officers / corporate liability policy.
Berkley initially denied coverage, then agreed to pay costs limited to responding to the subpoena, refused Call One’s demand for independent counsel, and appointed counsel to handle only the subpoena response.
The OAG had a sealed IFCA complaint alleging Call One failed to collect/remit certain taxes and fees; the OAG estimated State damages of ~$12M (trebled to ~$36M), exceeding policy limits.
Facing outsized exposure and Berkley’s refusal to defend or contribute, Call One settled with the State for $2.5M (without admitting wrongdoing) and then sued Berkley for breach of contract (duty to defend and indemnify) and for bad-faith denial under 215 ILCS 5/155.
Berkley moved to dismiss, arguing (inter alia) that IFCA relief is uninsurable (penalties or disgorgement), that the policy excludes such losses, and that there was a bona fide coverage dispute precluding a Section 155 claim.
The district court denied Berkley’s motion to dismiss, concluding the IFCA claims could seek compensatory damages (not necessarily penalties or disgorgement), the policy’s exclusions did not bar coverage at this stage, and Call One sufficiently pleaded a Section 155 claim for discovery to address.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether IFCA liability is uninsurable as a penalty	IFCA authorizes compensatory damages (actual loss) in addition to penalties; the IFCA complaint sought State losses for unremitted taxes, so coverage is potentially triggered	IFCA relief is effectively a penalty (or otherwise uninsurable), so policy cannot cover it	Court: Denied dismissal — IFCA provides both penalties and compensatory damages; complaint and exhibits show damages tied to State loss, so uninsurability argument fails at pleading stage
Whether recovery sought was disgorgement (uninsurable)	OAG calculated relief by State’s lost taxes, not by Call One’s profit; complaint contains no clear allegation of profit to be disgorged	Relief is really disgorgement of ill-gotten gains, which Illinois law bars insurers from covering	Court: Denied dismissal — the pleadings and IFCA complaint support compensatory-loss theory, not pure disgorgement, so uninsurability on disgorgement grounds is premature
Whether public policy bars coverage for IFCA/reverse-FCA claims (moral hazard)	Public-policy concerns do not categorically bar coverage; policy contains a fraud exclusion that applies only after final adjudication	Allowing coverage would create a moral hazard (insurees could keep ill-gotten gains); Mortenson suggests similar coverage is against public policy	Court: Denied dismissal — Mortenson is distinguishable; fraud/public-policy bar not shown on pleadings and policy already addresses fraud via exclusions requiring adjudication
Whether Call One plausibly stated a Section 155 bad-faith claim	Berkley acted unreasonably: denied a claim despite knowledge of a sealed complaint, refused independent counsel, and refused to participate in settlement discussions	There was a bona fide coverage dispute and legitimate defenses, so a Section 155 claim fails as a matter of law	Court: Denied dismissal — Call One alleged specific conduct supporting vexatious/unreasonable denial; Section 155 inquiry is factual and not resolvable on the pleadings

Key Cases Cited

Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: factual allegations must plausibly state a claim)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading framework)
Am. Bankers Ins. Co. of Fla. v. Shockley, 3 F.4th 322 (7th Cir. 2021) (duty to defend is broader than duty to indemnify)
Lagestee-Mulder, Inc. v. Consol. Ins. Co., 682 F.3d 1054 (7th Cir. 2012) (no duty to defend only when underlying complaint clearly falls outside coverage)
Mortenson v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 249 F.3d 667 (7th Cir. 2001) (public-policy/moral-hazard concerns regarding insurance for tax-penalty liabilities)
St. Paul Fire & Marine Ins. Co. v. Village of Franklin Park, 523 F.3d 754 (7th Cir. 2008) (claims seeking disgorgement or return of ill-gotten gains may be uninsurable)
Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001) (disgorgement-style relief is not insurable)
Cook County v. United States ex rel. Chandler, 538 U.S. 119 (2003) (trebling in false-claims context has compensatory remedial aspects)
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204 (Ill. 1992) (construction of insurance policies is a question of law; ambiguities construed against insurer)
Conn. Indem. Co. v. DER Travel Serv., Inc., 328 F.3d 347 (7th Cir. 2003) (coverage can be defeated by explicit policy exclusions for willful fraud)