Co-authored by: Zack Rosenberg

Although the Supreme Court continues to set the bar for class certification higher and higher, plaintiffs’ attorneys continue to file class action lawsuits of questionable merit.  The litigation costs required to gain dismissal of even groundless lawsuits are not insubstantial, and a defendant’s inability to fund a vigorous defense can make it susceptible to agreeing to a quick settlement, thereby perpetuating the cycle of filing baseless lawsuits.

 Under these circumstances, the value of available liability insurance for class action defendants cannot be over emphasized.  In fact, from a practical standpoint, coverage for defense costs is likely to be the most critical function of liability insurance for most class action defendants.  For this reason, liability policies may well be considered “litigation insurance.” See, e.g., Illinois Tool Works, Inc. v. Travelers Cas. & Sur. Co., No. 04 CH 21325 (Ill. Cir. Ct. Cook Co. April 12, 2013) (Kennedy, J.),  (“The duty to defend has been described as a form of ‘litigation insurance’ for the insured”); Perdue Farms, Inc. v. Travelers Cas. Ins.  Sur. Co. of Am., 448 F.3d 252, 258 (4th Cir. 2006) (“although the type of policy here considered is most often referred to as liability insurance, it is litigation insurance as well, protecting the insured from the expense of defending suits brought against him”); NL Indus. v. Commercial Union Ins. Co., 926 F. Supp. 446, 454 (D.N.J. 1996) (“Where the insurer has promised to defend, coverage includes litigation insurance as well”). 

As soon as a company learns that it is being sued in a class action, it should review all of its insurance policies to determine whether any of them potentially provide coverage.  The duty to defend typically is much broader than the duty to indemnify and is determined by reviewing the allegations of the complaint against the insurance policy. Even if just one of the claims in the complaint is potentially covered, the duty to defend the entire lawsuit generally is triggered. If there is any possibility of coverage, an insured should always err on the side of tendering the claim to its insurers.  Vague or meritless allegations and the absence of class certification may not preclude an insurer’s immediate defense obligation.

The breadth of an insured’s duty to defend is well illustrated in Hartford Accident and Cas. Co. v. Beaver, 466 F.3d 1289 (11th Cir. 2006), where the court held that a class action defendant was entitled to a defense even though the named plaintiff’s claim, in isolation, clearly was not covered.  In that case, the Eleventh Circuit, interpreting Florida law, ruled that if an insurer’s liability turns on whether a class is certified, the duty to defend is triggered as long as the underlying class action complaint alleges facts that fairly and potentially bring the suit within coverage.  The underlying lawsuit was originally brought by two named plaintiffs who alleged that Beaver failed to provide necessary care to nursing home residents.  Beaver settled with one named plaintiff, and the remaining named plaintiff’s stay at the nursing home post-dated the issuance of the Hartford policy.  Not surprisingly, Hartford moved for summary judgment on the ground that there was no occurrence during its policy period.   The District Court agreed, holding that prior to class certification, the complaint includes only the claims of the named plaintiff(s). 

The Eleventh Circuit reversed, noting that the district court’s analysis was applicable only to procedural and jurisdictional matters, and not to the question of whether an insurer has a duty to defend.  Nevertheless, Hartford argued that claims by putative class members are too remote and speculative to trigger the duty to defend.  The court disagreed because that the duty to defend is based solely on the allegations in the complaint.   Because “[t]he factual averments bearing on class certification [were] detailed and extensive,” the court was “satisfied that the Underlying Complaint ‘alleges facts that fairly and potentially bring the suit within policy coverage.'” Id. at 1293.  The court also addressed the pragmatic realities of class action litigation, observing that “the fight over class certification is often the whole ball game….The overwhelming importance of class certification to the ultimate resolution of the case militates strongly against leaving the insured without a defense until after a decision on class certification.”  Id. at 1294-1295.  Finally, the court dismissed Hartford’s argument that the duty to defend should not be triggered because the class may never be certified.  The court stated, “If the duty to defend arises in spite of the uncertainty and impracticality of defending wholly meritless individual claims, we think it equally clear that the duty to defend is not defeated by some uncertainty as to the merits of class certification.”  Id.   See also Zurich Am. Ins. Co. v. Nokia, Inc.,  268 S.W.3d 487, 496 (Tex. 2008) (despite the fact that personal injury claims are rarely appropriate for class certification, “the appropriateness of class certification is not at issue here and is not relevant to the duty to defend”).

 In Omega Flex, Inc. v. Pacific Employers Ins. Co., the Appeals Court of Massachusetts followed suit.  937 N.E.2d 52 (App. Ct. Mass. 2010).  The plaintiffs in the underlying class action alleged that Omega’s corrugated stainless steel tubing installed in their property lacked sufficient thickness to protect against combustion after a lightning strike.  Omega’s policy with Pacific provided coverage for product liability claims when the insured’s product accidentally damaged the property of a third party.  Because no actual property damage occurred to the name plaintiff’s premises, Pacific denied it had a duty to defend.  A year after the denial, the court certified the class for settlement purposes only, approved the settlement, and dismissed the action with prejudice.  Pacific agreed to pay its share of the damages and class counsel attorneys’ fees, but again refused to reimburse Omega Flex for its legal fees.  Omega Flex filed suit, and the court ruled in its favor, holding, “we do not believe that an insured must demonstrate that the plaintiffs will satisfy Rule 23 in order to receive a defense from its insurer….The fact that some of the claims may ultimately be deemed unsuitable for class treatment should not deprive the insured of the benefit of a defense, provided the complaint fairly can be read to assert one or more claims that fall within the scope of the policy.”  Id. at 268. 

 And just last week, in Illinois Tool Works, Inc. v. Travelers Cas. & Sur. Co., supra, an Illinois trial court held that an insurer must defend its insured even if facts discovered in the underlying cases prove that the allegations against the insured were baseless and that its insurers had no duty to indemnify.  The insured in that case, Illinois Tool Works (ITW), was sued in multiple toxic tort suits, alleging that ITW manufactured, sold, or distributed toxic welding products that caused injury during a certain exposure period.  ITW demonstrated in those cases that it did not sell any welding products until 1993, which was after the alleged exposure, but also after all of the insurance policies’ periods.  Based on that evidence, the insurers claimed they could not possibly have to indemnify ITW, so they also should have no duty to defend.  The court stated that the insurers “ignore the process and focus on the results [ITW] obtained in the underlying litigation.  [ITW] defended underlying, groundless, false, and/or fraudulent allegations that they “designed, manufactured, sold or distributed’ certain products with evidence that they did not do so before 1993.”  Id. at 25-26.  Because the evidence concerning the timing of ITW’s sale of welding products was outside the policies and the underlying complaints, that evidence had no bearing on the duty to defend.  Since ITW purchased “litigation insurance” in order to enable it to defend against baseless claims, the insurers were required to pay for its defense.  Id. at 25.

 As these cases demonstrate, allegations contained in class action lawsuits will be read broadly in order to determine if an insurer has a duty to defend.  Ultimate issues of liability, the insurer’s duty to indemnify and the appropriateness of class certification are not relevant to that determination.  Defendants are urged to immediately examine their insurance policies upon receipt of a class action complaint and to provide notice under all potentially implicated policies as soon as possible.