A U.S. Supreme Court ruling on whether the Securities and Exchange Commission has the authority to pursue the return of “ill-gotten gains” in the courts could have an indirect impact on directors and officers liability insurance coverage, experts say.

The court accepted the case, Securities and Exchange Commission v. Charles C. Liu et. al., for review earlier this month.

Experts, who were generally reluctant to predict how the court would rule, say a decision that would weaken the SEC’s ability to judicially pursue disgorgement could also impact cases filed by plaintiffs who pursue private litigation.

And while disgorgement is generally excluded in D&O policies, a ruling against the agency could lead it to pursue other avenues to recover funds that might not necessarily be excluded under the policies.

Mr. Liu allegedly obtained nearly $27 million in international investments for a proton therapy cancer treatment center in Southern California that was never built, and instead funneled more than $20 million of investor money to himself, his wife and marketing companies associated with the couple, according to court documents.

“The court has broad discretionary equitable power to order the disgorgement of ill-gotten gains to deprive a wrongdoer of unjust enrichment and to deter others from violating securities laws,” said the U.S. District Court in Los Angeles in an April 2017 ruling in the SEC’s favor that was later upheld by the 9th U.S. Circuit Court of Appeals in San Francisco.

The case follows the Supreme Court’s June 2017 ruling in Charles Kokesh v. Securities and Exchange Commission, in which it found disgorgement recovery is subject to a five year-statute of limitations,

That case involved a New Mexico-based investment adviser who had been ordered to pay $2.4 million in penalties plus $34.9 million in the disgorgement of illegal profits after the SEC sued him.

The SEC reported last week it had assessed about $4.3 billion in fines and disgorgement in fiscal 2019, up from $3.9 billion a year earlier.

“This is an issue that has been lurking in the lower courts for some time,” said Thomas O. Gorman, a partner with Dorsey & Whitney LLP in Washington whose practice includes defending firms in SEC investigations and enforcement actions.

“In the Kokesh case, they specifically reserved this issue for further consideration, and it has fostered a lot of commentary in the securities bar.”

The court may have felt the need to clarify its position on disgorgement because it considered the Kokesh ruling to be confusing, said Donna Ferrara, Chicago-based senior vice president and managing director at Arthur J. Gallagher & Co.

A ruling on the issue that does not permit disgorgement action by the SEC in the courts could impact civil litigation, say some observers.

“Oftentimes when there is an SEC investigation, that results in some type of public disclosure” that “increases the chance of a plaintiffs firm latching onto that and following that up with a securities class action or a derivative action,” said Sarah Downey, New York-based FINPRO and D&O product leader for Marsh USA Inc.

“Whatever the SEC uncovers by way of evidence in their actions would be very helpful to private plaintiffs. It’s not something that insurers look forward to,” said Joseph P. Monteleone, a partner with Weber Gallagher Simpson Stapleton Fires & Newby LLP in Bedminster, New Jersey, who represents insurers in coverage disputes.

A ruling on the issue would “give more certainty to insurers, as well as in the industry, about what potential exposure there could be to individuals and companies and insurance companies when they’re looking at an SEC investigation and potential lawsuit,” said Kenneth Yeadon, a partner with Hinshaw Culbertson LLP in Chicago and a former SEC enforcement attorney who defends companies.

A change in the kinds of remedies the SEC can get “is going to have an effect on insurers, even if they don’t cover disgorgement per se,” because D&O policies can cover investigations, he said.

Furthermore, “The SEC may attempt to get creative in its efforts to recover amounts that they believe their investigation shows that the defendants in the lawsuit shouldn’t be keeping,” which could affect insurance coverage, Mr. Yeadon said.

The ruling also could have an impact on legal fees, which are covered in D&O policies, said Daniel W. McCaughey, a partner with Ropes & Gray LLP in Boston, who represents firms in securities litigation and enforcement matters.

The SEC could still pursue disgorgement in administrative proceedings, which it has specific statutory authority to do, said Deborah R. Meshulam, a partner with DLA Piper in Washington, whose practice includes representing clients in SEC investigations.

“The key thing, I think, to understand this issue is that insurers have taken the position that disgorgement damages are uninsurable as a matter of public policy,” which means that despite any policy language, insurers say they are prohibited from paying them, said Peter M. Gillon, a partner with Pillsbury Winthrop Shaw Pittman LLP in Washington, who represents policyholders in D&O litigation.

“It’s almost too early to tell” what this case’s impact will be on D&O policyholders because briefs have not yet been submitted in the case, Ms. Downey said.

“We always try to engage in conversation with carriers” on the issue of coverage. Just because something is labeled disgorgement “doesn’t necessarily mean there should be no coverage,” she said. “We could argue an award labeled disgorgement is compensatory in nature and should be covered. Depending on how the court rules, it’s just too early to tell if the court’s ruling will make this coverage issue more black and white, or if the insurers will still be able to argue disgorgement is excluded for a number of reasons” while the broker argues it is insurable, said Ms. Downey.

Most observers are reluctant to forecast how the court will rule.

William Boeck, senior vice president, U.S. financial lines claims practice leader and global cyber wordings and claims leader for Lockton Cos. LLC in Kansas City, Missouri, said while he is not predicting the Supreme Court’s decision, it is “a conservative-leaning court, and they will typically construe a statute narrowly.”

“If I were the petitioners in the case, I would feel confident that my arguments would get the best possible hearing in front of the court,” he added.