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.

Photo of Darren Teshima Darren Teshima

Darren Teshima helps corporate policyholders resolve their most complex insurance coverage disputes by providing both creative business solutions and strategic representation in litigation. Chambers USA (2022) has clients praising Darren as “incredibly efficient, responsive and practical” adding, “For any insurance coverage questions, he…

Darren Teshima helps corporate policyholders resolve their most complex insurance coverage disputes by providing both creative business solutions and strategic representation in litigation. Chambers USA (2022) has clients praising Darren as “incredibly efficient, responsive and practical” adding, “For any insurance coverage questions, he is my first call.”

Darren serves as a true business partner to technology and financial services clients, working closely with in-house risk management and legal departments to guide them through the cutting-edge issues they’re facing today, from D&O coverage on SPAC transactions, to reps & warranties and indemnification coverage in agreements and transactions, to E&O and cyber coverage related to data breaches.

When litigation is necessary, Darren helps clients assert their rights. He has successfully litigated high stakes commercial disputes with significant wins in connection with insurance coverage, D&O coverage, and cyber insurance for some of the largest data breaches in history.

Darren also is deeply committed to pro bono work and community involvement. He’s handled administrative trials and hearings on behalf of asylum seekers and low-income tenants and provided litigation advice to nonprofit organizations. For his efforts, Legal Services for Children honored him with the Pro Bono Advocate Award twice.

Darren also is a leader in the community, and currently serves as the Chair of the Board of Asian Americans Advancing Justice – Asian Law Caucus, and has previously served on the board of the Asian American Bar Association of the Greater Bay Area (AABA).

Photo of Matt Schlesinger Matt Schlesinger

Matt Schlesinger represents policyholders nationwide in insurance coverage disputes and counsels clients on insurance-related issues. Legal 500 reports that Matt “has a depth and breadth of experience and is very sensitive to business needs.” Using a combination of litigation and alternative dispute resolution…

Matt Schlesinger represents policyholders nationwide in insurance coverage disputes and counsels clients on insurance-related issues. Legal 500 reports that Matt “has a depth and breadth of experience and is very sensitive to business needs.” Using a combination of litigation and alternative dispute resolution, Matt has cost-effectively recovered hundreds of millions for clients in a wide variety of hotly contested complex, multi-party cases. His clients range from Fortune 100 companies to smaller public and privately held entities, and include Major League Baseball, the National Hockey League and individual professional sports entities and teams as well as large financial institutions and technology companies.

Matt has particular experience obtaining coverage under financial institution and other crime bonds for losses resulting from large, sophisticated frauds, as well as handling coverage for shareholder and customer-driven financial services related claims, including under directors and officers, professional liability, and specialty policies. He also has deep experience with first-party property damage and business interruption claims. Matt has also successfully handled cyber-liability, environmental and asbestos liability, intellectual property, and a range of other claims and coverage disputes and issues. He often is retained to help negotiate a resolution to the underlying matter, as well as the insurance coverage dispute.

Matt also actively consults on policy renewals, helping clients obtain the most favorable policy terms possible. He speaks, writes, and is quoted on insurance coverage issues and has co-chaired or participated in numerous insurance coverage conferences.