When a company learns it is the subject of a class-action lawsuit, insurance coverage may not be top of mind, but considering available coverage for the defense and resolution of the case should be a priority. A variety of insurance policies may provide coverage depending on the underlying allegations, even if some of the allegations or relief sought present coverage challenges. To ensure companies are taking full advantage of available coverage, and meeting any notice obligations under insurance policies, it is wise to dust off the applicable policies and consult with coverage counsel.
- Identify what coverages may apply.
- Directors & Officers (D&O) Policies: Even for non-securities class actions, it is useful to review D&O coverage as a potential source of coverage, particularly if the company is private or if an individual director or officer has been named (or may be named) as a defendant.
- Errors & Omissions (E&O) Policies: These policies, which provide coverage for claims of alleged negligence or other misconduct in the provision of services to customers, may be implicated by a consumer class action alleging that a company failed to provide or misrepresented its services.
- Cyber Policies: These policies cover class actions alleging, among other things, privacy violations arising out of a data breach or losses stemming from a network outage or service disruption. For certain technology companies, this coverage may be provided in the policy containing the E&O coverage discussed above.
- General Liability: Covering third-party property damage and bodily injury, this coverage could be triggered by products liability claims.
- Determine notice requirements.
- Insurance policies include notice requirements about when the policyholder should inform the insurer of a claim (or potential claim). This notice provision is particularly important when dealing with “claims made” policies like D&O, E&O and cyber policies—where coverage is triggered based on the date of the underlying claim (as opposed to the date of the alleged injury)—to ensure notice is provided during the current policy period. Insurers often refuse to cover any defense costs that are incurred prior to notice of a claim, so it is useful to provide prompt notice.
- Consider coverage implications for decisions concerning legal defense and settlements.
- One of the most valuable coverages provided under triggered policies can be the insurer’s duty to defend or duty to advance defense costs. But defense coverage often comes with provisions stating the insurer gets to select defense counsel or must consent to the policyholder’s choice of counsel, which can lead to early disagreements with the insurer. An insurer does not have an unfettered right to choose counsel, however, particularly when the insurer has reserved rights to deny coverage on certain issues, so it is important to consult with coverage counsel about how to respond.
- Likewise, it is common for policies to require the policyholder obtain the insurer’s consent before entering into any settlement or even offering to settle. If the underlying putative class action presents an early settlement opportunity, it is crucial to notify the insurer and work with coverage counsel to position the settlement for coverage.
Companies should also keep in mind that even if a class action does not immediately appear to be the type of claim covered under its insurance policy, or even if it appears to be subject to an exclusion, there still may be coverage for defense costs. This is because under most policies the availability of defense cost coverage is determined by the allegations in the complaint, and is triggered if any claim in the complaint is potentially covered. This means that even if the main focus of the action is an allegation that may not be covered, if there is a potentially covered claim somewhere in the complaint, the policyholder may be able to recover defense costs for the entire action.
In short, insurance coverage exists for costs associated with class actions, even if it is not immediately apparent. Companies invest in insurance coverage to protect them from unexpected events, like being faced with a class action, and they should not be too quick to discount the potential benefits this investment may provide.