In recent years, product liability class-action lawsuits have been filed against companies in a broad spectrum of industries, including pharmaceuticals, medical devices, asbestos, building products and tobacco, to name a few.

Although recent state and federal legislation–such as the Class Action Fairness Act of 2005–may have put an end to the explosive growth in class actions over the past decade, new industries continue to come under attack every day. Most ultimately are successful in fending off mass-litigation attacks, but defense fees for national coordinating counsel and dozens of local counsel can be staggering.

Because of the crippling costs to defend these suits, it is crucial for risk managers to move quickly to secure a defense cost agreement with primary liability insurers.

Since many class-action complaints allege harm beginning decades ago, or fail to specify any exact period of harm, policyholders should provide notice not only to their current insurers but to all of their historical carriers, and should seek defense cost commitments from insurers–either on a per-capita basis or percentage basis, based on each insurer's time on the risk.

Any insurer that agrees to participate in the defense will do so subject to a reservation of rights, allowing the insurer later to dispute indemnity coverage if there is a judgment or settlement in the case.

Insurers frequently respond with a disclaimer of coverage obligations premised on those allegations in the complaint that seek arguably uncovered damages: claims for intentional conduct, such as fraud; breach of warranty claims; and punitive damages claims.

Disclaiming insurers often ignore allegations in the complaint regarding claimants' bodily injury or property damage–allegations that unquestionably trigger an insurer's duty to defend.

The manner in which plaintiffs' counsel plead their case often provides ammunition to the insurer by highlighting uncovered claims and obscuring covered ones.

Plaintiffs' counsel focuses first and foremost on achieving class certification, since a substantial settlement is almost sure to follow.

Allegations of individualized bodily injury or property damage are class killers. So whereas the impetus of the majority of consumer class-action lawsuits is an allegation that a product causes bodily injury (such as tobacco, asbestos, breast implants and prescription drugs) or property damage (such as asbestos, environmental contaminants and building products), class counsel routinely plead claims such as misrepresentation and failure to warn, and seek remedies that are independent of claimants' individualized damages, such as refunds, vouchers, warranty payouts and medical monitoring funds.

The key to overcoming an insurer's disclaimer of defense obligations is to focus on those allegations that are potentially covered, since in most jurisdictions an insurer has a duty to defend the entire action so long as there exists the possibility that any one claim will be covered.

The first step is to carefully scrutinize the complaint, treating all allegations (no matter how outlandish) as if they were true. Most insurance policies explicitly promise to defend suits raising claims that are groundless, false, or fraudulent.

Any demand for damages based on bodily injury or property damage is sufficient to trigger an insurer's obligation to defend the lawsuit, even if such demand is only tangentially linked, or simply seeks “any other relief” due to alleged bodily injury or property damage.

If the complaint does not clearly assert a right to damages based on bodily injury or property damage, many jurisdictions allow a policyholder to rely on information found outside of the complaint. Discovery requests can help obtain an elaboration of plaintiffs' true claims and demands.

For example, if plaintiffs downplay bodily injury claims because of a concern that causation issues will create difficulty proving commonality, interrogatories and requests for admission seeking to limit the scope of the lawsuit can force plaintiffs to admit that they seek not only equitable relief but compensatory damages as well.

Few plaintiffs' counsel will ever concede claims for bodily injury or property damage, as those claims often drive the settlement discussions.

The findings of the trial court in granting or denying class certification, or in approving or rejecting a proposed settlement, may also supply the information necessary to establish a right to defense coverage. While plaintiffs' counsel may obscure the true nature of their claims, the court's factual findings can be illuminating, and will be largely unassailable in subsequent coverage litigation.

Class counsel's refusal to release bodily injury or property damage claims without significant compensation can help confirm the existence of coverage. Coverage may be triggered even when the approved settlement fails to specifically earmark funds to compensate class members for their individualized injury, since the focus for insurance coverage purposes is why the money was paid, not the form of the settlement or the distribution formula.

It is never too late to present to your insurers new information or allegations that create the potential for coverage. Even though it takes perseverance and resources that should be focused on defending the claims, the potential payoff is enormous.

Obtaining a defense under a reservation of rights relieves the immediate financial stress of the defense cost burden, ensures that the case can be defended aggressively, and turns the insurer into a partner rather than an adversary.

If the effort proves unsuccessful, then the record has been established for coverage litigation, where the recalcitrant insurer will face the consequences of breaching its duty to defend, including possible loss of indemnity coverage defenses and exposure far beyond its coverage limits.

Risk managers must quickly secure a defense cost agreement with insurers to avoid crippling costs

“Obtaining a defense under a reservation of rights relieves the immediate financial stress of the defense cost burden, ensures the case can be defended aggressively, and turns the insurer into a partner rather than an adversary.”

Robert H. Friedman

Special Reports /

Don't Be Left Defenseless On Product Suits

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