Ryerson Inc. v. Federal Insurance
2012 U.S. App. LEXIS 7372
7th Cir.2012Background
- Diversity suit governed by Illinois law; Ryerson v. Federal Insurance over an Executive Protection Policy.
- 1998 sale of Ryerson’s subsidiaries to EMC for $29M; EMC later sued Ryerson for fraud, seeking rescission, contract breach, and misrepresentations.
- EMC alleged Ryerson concealed a customer’s demand for price cuts that threatened the subsidiary’s profitability; EMC sought return of overpaid purchase price plus related costs.
- Federal refused to reimburse Ryerson’s defense costs, contending EMC’s claim was not a covered risk.
- Three years into EMC’s suit, settlement occurred: Ryerson paid an $8.5M post-closing price adjustment to reflect the purchase price change; Federal again declined coverage.
- Ryerson sought declaratory judgment that the $8.5M refund fell within policy’s “loss” coverage for covered claims and damages.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether restitution from a fraud settlement is a covered 'loss | Ryerson: restitution qualifies as loss under policy. | Federal: restitution is not loss; only damages are covered. | No; restitution of fraud proceeds not a covered loss. |
| Whether insurance covers profits disgorged from fraud via restitution | Ryerson contends policy should cover all loss; disgorgement may be loss. | Disgorged profits not insurable as loss; would encourage fraud. | Disgorged profits are not a recoverable loss under the policy. |
| Whether 'mend the hold' allows changing defenses mid-suit | Ryerson: Federal’s shift violates mend the hold. | Doctrines allow broad defense development; no prejudice required. | Mend the hold not violated; change permissible absent prejudice. |
| Whether allocation permits converting restitution to damages for coverage | If combination exists, damages portion may be covered. | Adjusting to treat restitution separately preserves noncoverage. | If damages arise, their allocation governs coverage; restitution remains noncovered. |
Key Cases Cited
- Scottsdale Indemnity Co. v. Village of Crestwood, 673 F.3d 715 (7th Cir. 2012) (insurable interest limits on fraud-related proceeds)
- Federal Ins. Co. v. Arthur Andersen LLP, 522 F.3d 740 (7th Cir. 2008) (no insurance for uninsurable profits from fraud)
- Mortenson v. National Union Fire Ins. Co., 249 F.3d 667 (7th Cir. 2001) (limits of 'loss' in insurance policies)
- Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001) (profits-from-fraud not a recoverable loss)
- Pan Pacific Retail Properties, Inc. v. Gulf Ins. Co., 471 F.3d 961 (9th Cir. 2006) (allocation between restitution and damages)
- Unified Western Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106 (9th Cir. 2006) (allocation and coverage principles)
- In re TransTexas Gas Corp., 597 F.3d 298 (5th Cir. 2010) (restitution/damages distinction in coverage)
- St. Paul Fire & Marine Ins. Co. v. Village of Franklin Park, 523 F.3d 754 (7th Cir. 2008) (coverage analysis in fraud contexts)
- Bank of the West v. Superior Court, 2 Cal.4th 1254 (Cal. 1992) (restatement of restitution principles)