CHICAGO (CN) – A metal producer cannot claim an $8.5 million fraud settlement from its insurance provider, because such a policy would allow the company to be reimbursed for fraud, the 7th Circuit ruled.
In 1998, Ryerson, Inc., which distributes metals in North American and China, sold a group of subsidiaries to EMC for $29 million.
One of the subsidiaries, Magnetics International, lost a major client shortly after the sale. According to EMC, Ryerson knew of the client’s plans to open its own plant if prices were not lowered. When EMC bought the company and did not cut prices, the client made good on this promise and left.
EMC sued Ryerson seeking rescission of the sale and restitution for the purchase price. By concealing the impending loss, EMC alleged, Ryerson had fraudulently induced EMC to buy the subsidiary.
After three years of legal wrangling, the parties settled for an $8.5 million partial refund to EMC.
Federal Insurance Company, Ryerson’s insurer, refused to indemnify Ryerson for the settlement costs, claiming that they did not constitute a covered “loss” under the policy. Ryerson then sued Federal, seeking a declaratory judgment.
U.S. District Judge Elaine Bucklo ruled against Ryerson, finding that such a reading would encourage fraud.
“If disgorging such proceeds is included within the policy’s definition of ‘loss,’ thieves could buy insurance against having to return money they stole. No one writes such insurance… and no state would enforce such an insurance policy if it were written,” 7th Circuit Judge Richard Posner wrote, affirming Bucklo’s ruling.
“If Ryerson can obtain reimbursement of that amount from the insurance company, it will have gotten away with fraud. It will get to keep $29 million… even though, if EMC’s claim that Ryerson agreed to settle was not completely meritless, some portion of the $29 million was proceeds of fraud.”
Had the settlement had denoted separate payments reflecting restitution and damages, then the insurance company could have been liable for the damages, the court wrote. But since Ryerson made no effort to allocate the settlement in this way, Federal has no contractual duty to pay.