The Gathering Storm

The prevalence of mass-tort litigation has increased exponentially over the last four decades and has become a way of life. Thousands of individuals as well as governmental entities have sued countless corporations for injuries caused by toxic substances—such as asbestos and talc—contained in consumer products as well as pharmaceutical products and medical devices, including opioids and pelvic mesh.

Mass-tort lawsuits have become a staple of modern litigation and will likely continue for decades. As a result of this wave of litigation, businesses have diverted significant amounts of money to legal expenses, and the sheer volume has the potential to drive them into bankruptcy. As such, many corporations have turned to their insurance policies for relief, resulting in increased frequency of insurance-coverage disputes and litigation.

These coverage disputes can lead to several avenues of potential bad-faith actions that are not uncommon when there are multiple parties and underlying claims. There is also a growing number of bad-faith implications, despite the lack of contractual obligations, between primary and excess carriers. There is a skewed and unique relationship between primary and excess insurers, and bad-faith claims can stem from a wide range of alleged wrongdoings that can put carriers at risk for significant financial exposure.

A majority of jurisdictions either have bad-faith statutes or recognize common law bad faith. The National Association of Insurance Commissioners has promulgated a model Unfair Claims Settlement Practices Act (UCSPA) to specify what constitutes fair and unfair claims practices. Most states have adopted a version of the statute that allows for a common-law cause of action with consequential damages. Although the precise language of the statutes differ, the majority require some form of demonstration that the claim was handled in a reckless manner—negligence alone is not sufficient. 

Mass-Litigation Trends

The recent trend in alleged sexual molestation has caused many states to enact the Child Victims Act (CVA), which allows adult victims to pursue damages for acts of alleged molestation that occurred when they were minors. New legislation allows reopening the statute of limitations regardless of when the alleged abuse took place. This has resulted in an increased frequency of claims against many religious and social organizations and schools.

Defense expenses could be costly for primary carriers that have myriad defense obligations. In many instances, the duty to defend exists for the primary carrier, although the duty to indemnify would be questionable and determined during discovery. It could be deemed bad faith to deny the insured a defense based on unfounded allegations. Most complaints include allegations of negligent hiring or failure to supervise in an effort to trigger coverage.

Numerous lawsuits have been filed against drug manufacturers, distributors, and pharmacies regarding the alleged over-prescription and oversupply of controlled substances. This alleged failure to monitor the number of pills being dispensed helped fuel the opioid drug-addiction crisis. States, cities, and counties have brought the majority of these cases.

Most of the alleged damages sought are economic in nature due to the social harms at issue, and may not be covered under a general liability policy, as they do not seek recovery for any one person’s bodily injury. In fact, the majority of these cases do not allege covered damages, such as bodily injury or property damage. Insurance carriers routinely advise their insureds of the coverage issues to avoid the potential for a bad-faith claim from those policyholders. 

Then there are business-interruption lawsuits. Federal government and individual states’ “state of emergency” declarations related to COVID-19 have had a staggering impact on businesses as well as their insurance carriers. This year, hundreds of lawsuits have been filed by businesses attempting to lessen the economic impact due to uncertainty surrounding when or if they will be able to resume operations.

Legislation has been proposed and continues to evolve throughout the COVID-19 crisis. Most commercial-property policies require that the loss in business revenue be caused by the physical loss, damage, or destruction of property. A majority of the complaints do not allege any type of physical damage and, instead, focus primarily on governmental orders that have prevented businesses from opening.

In large part, insurance carriers have denied coverage in light of the lack of physical damage. It is crucial to scrutinize the facts, the policy, and law in the particular jurisdiction to determine the availability of business-interruption coverage, as the failure to do so could result in bad-faith claims.

Best Practices

It is paramount for insureds and carriers in the insurance tower to keep each other reasonably informed due to recent trends in mass tort and product litigation. A bad-faith claim can potentially arise if the insured and the primary insurer owe a duty to cooperate with the excess insurer. These obligations can include providing timely notice of the claim; keeping the excess carrier informed of significant facts learned during the investigation and sharing potential exposure analysis without regard to any applicable limits, evaluations, and valuations of retained defense counsel; and the status of settlement negotiations, particularly if the claim may expose the excess layer.

Out of the insured, primary carrier, and excess carrier, the primary insurer often has the most information about the claim as well as the expertise to evaluate the information to determine if the excess policy may be implicated. All too often, the insured and the primary fail to give timely notice and provide the excess carrier with the opportunity to participate in potential resolution of the claim.

Insurers also have a duty to handle and negotiate settlement in good faith. There could be claims for failure to settle the case within the primary layer, or, on an alternate spectrum, the primary prematurely exhausts limits. Regarding the former, when a verdict impacts the excess carrier’s policy, a claim for bad faith can arise against the primary carrier if it had an opportunity to settle within its policy limit but failed to negotiate with an open mind. The latter scenario can occur when the primary limits are relatively low in relation to the alleged claim. Further, the primary may fail in its duty to investigate promptly and diligently when its policy limits will likely be consumed. As a result, the excess carrier could be left exposed with a substantial liability limit. 

Because of varying state laws, policies, and the facts of each claim, insurance companies—whether at the primary or excess layer—must act carefully and deliberately at all steps of the process. All parties must remain aware of the realm of possibilities relating to underlying claims and the potential for bad-faith exposure.