Claims-Made Coverage and Mass Tort Claims

Since the mid-1980s, insurers hoping to curtail their long-tail exposures (such as those concerning asbestos and environmental claims) have increased their use of claims-made forms for commercial liability risks. Properly acquired, with appropriate limits, a claims-made program should provide a policyholder with the same seamless protection as an occurrence-based program. Policyholders properly insured under a claims-made program should therefore expect protection not only for isolated exposures, but for mass tort exposures as well, such as class actions and multidistrict litigation proceedings. Unfortunately, some insurers have taken positions that, if accepted, would create coverage gaps. Policyholders therefore need to proactively evaluate their insurance programs and, if faced with the need to defend against a mass tort proceeding, promptly obtain commitments from their insurers to accept responsibility for defense and indemnity.

Mass torts are generally resolved through two mechanisms: class actions or multidistrict litigation (MDL). A class action involves certification by a court of a class consisting of all claimants suffering similar injuries for similar reasons. An MDL proceeding generally involves the consolidation in one court for pretrial purposes of multiple lawsuits by different claimants suffering similar injuries. Where a global settlement process is determined to be the best mechanism to resolve a mass tort exposure, these two mechanisms (short of a bankruptcy proceeding) are the principal means by which that resolution can be reached. Oftentimes the use of these mechanisms is in both the policyholders’ and insurers’ interests. However, there are some insurers that have used the nature of these proceedings as a basis for avoiding liability under their claims-made forms.

Insurers have relied on two types of provisions in particular — those concerning when a claim is deemed made and those concerning the “relation-back” of occurrences — to attempt to limit coverage for mass torts. Claims-made policies generally have three coverage triggers: First, there must be bodily injury or property damage caused by an occurrence. Second, bodily injury or property damage must not occur before a specified date (generally called the “retroactive date”). And third, the claim for damages because of the bodily injury or property damage must be deemed first made during the policy period. Many policy forms also contain requirements that claims arising out of factually related injuries should be deemed to relate back to earlier dates, in particular to the date the first such claim was made.

For example, one carrier’s claims-made policies include provisions that “batch” occurrences so that there is only one occurrence for “all products which have the same known or suspected defect or deficiency.” When a class action is involved, different carriers may take different positions as to when the claims covered by the class are deemed made. For instance, a carrier covering policy years after the filing of the class action may take the position that all claims are made during the year the class action was filed, while those covering the policy year in which the complaint was filed may take the position that claims are not made until the class member is identified, or until the class is certified. The resolution of these issues may not only impact whether there is coverage, but also the available limits, as well as the amount and number of deductibles.

In most cases, the logical approach to a class action is to treat the claims of all members of the class as being made at the time the class action is filed. A claim is usually defined as a demand for compensation or other relief and thus seems to be made at the time of the class action complaint — that is the date that compensation was first demanded for all members of the eventually certified class. That was the view adopted by the court in American Insurance Company v. St. Jude Medical Inc. There, St. Jude had manufactured Silizone-coated artificial heart valves that led to a series of lawsuits, including a class action. The primary insurer determined that “all claims arising out of the Silzone recall will constitute a single occurrence … [and] all claims arising from products that are the subject of the recall will be deemed to have been made during the [1999 to 2000] policy period,” thus falling within the policy’s coverage. However, AIC, one of St. Jude’s excess insurers, disagreed. It argued that its policy required the bodily injury to actually occur during the policy period and that the batch clause relied upon by the underlying carrier could not alter this requirement. The court disagreed with the excess carrier. A similar conclusion was reached by the U.S. Court of Appeals for the Eighth Circuit, reasoning that “the nationwide class action … put [the insured] on notice that, if the class was certified, every … client who did not opt out had already asserted claims for the wrongful acts alleged.”

Claims-made carriers seeking to shift the date of claim from the date the class action complaint was filed have tried to justify their position by contending that until the class is certified, the named plaintiff “cannot legally bind members of the proposed class” or that “a nonnamed class member is [not] a party to the class-action litigation before the class is certified.” But these principles, although undoubtedly true as a matter of federal procedure, should have no bearing on the interpretation of the insurance policy. Nonetheless, when faced with a class action complaint, policyholders need to carefully evaluate their policy language and obtain a determination as to which carriers will be responsible for the defense and indemnity. It will often be in the insured’s interest to do this sooner rather than later so that it may obtain coverage for the costs of defending such a proceeding and to ensure that the funds available for settlement are known early in the proceeding.

A series of decisions by the U.S. Supreme Court has made the use of class actions difficult, if not impossible, in connection with mass torts, (although one exception appears to be consumer class actions relating to breach of information privacy). Given these rulings, many mass torts would not survive attempts at class certification and, accordingly, with the exception of certain claims involving violation of federal standards, such as security claims, the majority of such disputes will need to be involved in another manner.

Under Title 28 of the U.S. Code, “[w]hen civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings.” While a class action can address claims by all claimants (upon certification), actions consolidated in an MDL proceeding cannot. They can address only actions filed, although actions filed after the creation of an MDL can be transferred to the MDL court during the period the MDL is pending. Furthermore, only actions filed in federal courts can be consolidated in an MDL proceeding. In addition, future claimants will not be a part of the MDL and their claims, if made, are not part of the MDL proceeding unless transferred.

This can present problems for a policyholder. The standard for instituting an MDL proceeding is that there be “civil actions involving one or more common questions of fact.” If this standard is met, insurers have argued, the issues underlying each of the claims are the same and the relation-back clause should be triggered. Using this argument, insurers with policies in effect after the date of the first case consolidated in the MDL may contend that claims made during their policies should relate back to prior claim years and will argue that the claim has not been made during their period. On the other hand, insurers with policies in effect at the earlier date will argue against the relation back clause’s applying, hoping to put coverage for the claims in later policy periods. Again, not only will the existence and the amount of coverage be impacted by this dispute, but the number and amount of deductibles may be as well. Consequently, the insured will be faced with an uncertainty regarding its available coverage while the insurer’s competing claims are resolved. Here too the insured needs to obtain an early resolution of these issues, if it is to be in a position to resolve the mass tort claims.

In short, although a claims-made program properly structured should be able to provide the insured with seamless coverage and protection against mass torts, positions taken by certain insurers can create uncertainty and delay the efficient resolution of these claims. Policyholders should take proactive steps to eliminate this uncertainty, if possible, at the time the policy is purchased and, if necessary, at the inception of the threat of a mass tort exposure.

Rita Davis and Patrick McDermott of Hunton & Williams provided helpful comments regarding the subject of this article.