To Insure or Not to Insure with Class Action Settlement Insurance? That is the Question.
For most companies, Class Action Settlement Insurance is the answer.
Few organizations walk away from a class action lawsuit unscathed. After spending significant sums to defend, the vast majority of cases result in some type of monetary settlement. Additionally, key executives can be diverted from business for months on end. Adding insult to injury, today’s media climate dramatically increases the likelihood that a class action will go viral. Cases against popular brands are frequently picked up by national news sources. Moreover, scores of websites and social media pages are dedicated to finding putative class members and instructing them on how to make a claim. In one widely publicized action, for example, a settlement involving the energy-drink brand Red Bull resulted in nearly 3 million class members seeking a $10 payout. In short, the risks associated with class action suits are greater than ever.
But there is a way to mitigate this risk. Risk Settlements analyzes the financial risk arising out of litigation and settlement and develops solutions to meet the financial, legal, and business objectives of companies involved in litigation. Specifically, Risk Settlements can access Class Action Settlement Insurance (CASI) which is an effective tool purchased after a class action suit has been filed and transfer the financial uncertainty of settlement away from the company’s balance sheet to an insurer.
This article explores whether companies should insure against the financial risk arising out of a class action settlement.
When do companies look to insure against the financial risk of a class action settlement?
The following is a non-exhaustive list of reasons why companies seek to insure the risk of a class action settlement:
- The board of directors, owners, or stakeholders need certainty on the cost of settlement.
- The company is concerned about the volatility or uncertainty of the various financial outcomes.
- The company must fix the cost of settlement to make it economically possible (e.g. the company is unable to take a reserve for the full amount of the settlement exposure).
- The company is considering an M&A transaction and needs to ring fence the liability and liquidate the cost.
- The company’s loan covenants require it to cap the exposure from settlement.
- The company cannot withstand a viral outcome where most or all of the settlement is paid out.
CASI removes these risks. The organization and its stakeholders pay a fixed cost in exchange for risk transfer of the range of financial outcomes that may occur from the settlement. The insurer then bears the burden and absorbs the payout risk. The financial jeopardy then ceases to exist, which allows the company to resume normal operations.
Are there Circumstances where CASI doesn’t make sense?
While CASI is an invaluable product in most instances, some organizations simply don’t need it. For example, if the company (i) has excess cash reserves that can cover a viral settlement; (ii) settles multiple cases in a year and can internally diversify the risk; (iii) has no concerns about a settlement impacting its loan covenants, liquidity, or balance sheet; or (iv) has a high risk tolerance and is comfortable with the full range of financial outcomes, risk transfer may not be attractive. In reality, however, very few companies are in such an enviable position. For those companies with concerns about the impact of a class action settlement, the cost certainty of a CASI policy should be the solution they need to mitigate risk and provide an attractive off-ramp from an otherwise unpleasant experience.