Cohen v. Lovitt & Touche, Inc., 668 Ariz. Adv. Rep. 36 (App Div. II, September 6, 2013) (J. Ekerstrom)
INSURING AGAINST OBLIGATION OF INSURED TO MAKE RESTITUTIONARY PAYMENTS DUE TO NEGLIGENCE NOT AGAINST PUBLIC POLICY AND BROKER COULD BE LIABLE FOR FAILURE TO PROCURE SUCH INSURANCE
Plaintiffs are the company that owned and operated the Canyon Ranch in Massachusetts and an individual board member with that company. Plaintiffs hired defendant Lovitt & Touche to obtain directors and officers liability insurance. Subsequently a class action was filed against plaintiffs for failure to pay service fees to its employees under Massachusetts "tip statute." The suit was settled for $16 million. The corporate defendant was insolvent and plaintiff directors and officers who were sued personally as well, paid the settlement out of personal funds. They then sued the insurance company and broker for breach of contract, bad faith and negligent failure to procure appropriate insurance covering this loss. Defendants were granted summary judgment by the trial court on the basis the settlement was restitutionary in nature, not a "loss," and therefore uninsurable as a matter of public policy. Plaintiffs then settled with the insurance companies but appealed the claim against the broker. The Arizona Court of Appeals reversed and remanded.
The trial court relied upon case law in other jurisdictions that holds because restitutionary payments involve returning funds the insured never had a right to hold in the first place, public policy prohibits allowing insureds to insure against their wrongful retention of the funds. The court of appeals however found the case of Ocotillo, LLC v. WLB Group, Inc., 219 Ariz. 200, 196 P.3d 222, 224 (2008) more instructive. In Ocotillo the Arizona Supreme Court held that absent legislative or judicial prohibitions, public policy interests must be weighed against the right to freely contract before public policy can defeat the right to contract. Relying upon the Restatement Second of Contracts §178, the court found the "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. Restatement §178. 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."
Weighing the factors here the court found no legislation or judicial decisions making it inappropriate to insure the obligation to make restitutionary payments. Further, the court found that the facts viewed most favorably to the plaintiffs here would lead to the conclusion that while plaintiffs may have been negligent in failing to research and understand Massachusetts law, there is no evidence they acted intentionally or maliciously; they simply didn't know Massachusetts mandated these fees be paid to employees. Because an insuring agreement could be drafted to avoid any public policy concerns, i.e., to only cover negligent failure to pay the service fees to employees and not intentional or malicious conduct, summary judgment was inappropriate.