Directors and officers of a business were personally liable for a settlement after alleged violations of a Massachusetts statute. The directors and officers sought reimbursement under their director and officer insurance policies. The insurance companies refused to pay, claiming that the policies excluded coverage or, alternatively, that the settlement was restitutionary and that restitution payments are uninsurable as a matter of public policy. The Superior Court granted summary judgment in favor of the insurers on the latter issue, finding that restitutionary payments are not “losses” that can be insured.
The Court of Appeals, Division Two, reversed, holding that Arizona law does not as a matter of public policy prohibit insurance coverage for restitution payments. The Court relied heavily upon Arizona’s strong preference for contract enforcement and general hesitation to declare contractual provisions invalid on public policy grounds and Restatement (Second) of Contracts § 178. Under the Restatement, “courts should rely on public policy to displace the private ordering of relationships only when the term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the term’s enforcement.” Factors that favor enforcement of a contract include the parties’ justified expectations, forfeiture that would result if the contract were not enforced, and public interest in having the term enforced. Factors that weigh against enforcement include the strength of the public policy involved, the likelihood that denying enforcement will further the policy, the seriousness and deliberateness of any misconduct involved, and the directness or attenuation between the misconduct and the contract term. In Arizona, the Court explained, the policy forbidding insurance coverage for restitutionary payments is not strong because it has never been expressed in any legislation or judicial decisions.
The Court did not address whether the particular policies at issue excluded coverage for restitution payments.
Judge Eckerstrom wrote the opinion. Judges Espinosa and Miller concurred.
Posted by: Eric Fraser