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What Is Class Action Settlement Insurance?

Risk Settlements > Blogs & Articles  > What Is Class Action Settlement Insurance?

What Is Class Action Settlement Insurance?

Class Action Settlement Insurance (“CASI”) allows companies to settle class action lawsuits by transferring the uncertainty and variability of the outcome to an insurance company.  CASI replaces millions of dollars in liability with finality and certainty so that the company can get back to its core mission.

What Are the Current Trends in Class Action Litigation?

Today’s companies face a continuing increase in the number, severity, complexity and financial risk arising from class action litigation.  As the exposure increases, so does the spending on defense costs and resolution.  According to the Carlton Fields 2019 Survey, the trends are alarming:

  • class action spending has increased the past four consecutive years with the expectation of that spending rise to continue;
  • the average number of matters per company increased to 7.8;
  • the percentage of companies facing class actions considered “complex, high-risk, or bet-the-company” matters increased, while fewer companies reported facing lower exposure cases;
  • in weighing the variables considered most important in evaluating class action risk, companies consistently ranked exposure as the most concerning. 

Simply put, financial risk arising out of class action litigation is increasing across all sectors and industries.  No company is immune and will likely face some form of litigation exposure.

Designing Settlement Structure Has Its Own Risks

Just as class cases are complex, so is designing an appropriate settlement that will meet court approval.  The parties may agree to a settlement, but that never guarantees the judge will approve the settlement.  Below are some recent examples of settlements which were rejected:

  • In re: Packaged Seafood Products Antitrust Litigation, Case No. 3:15-md-02670, United States District Court, Southern District of California:  Judge Janis L. Sammartino recently denied preliminary approval of the class action settlement, submitted as a potential resolution of allegations regarding fraudulent pricing practices.  She found the settlement had a lack of factual assertions, too low of settlement payments to class members, and too high a payment of attorneys’ fees. 
  • In re: Yahoo Inc Customer Data Security Breach Litigation, Case No. 16-md-02752, United States District Court, Northern District of California:  Judge Lucy Koh denied the proposed settlement of a data breach matter due to its failure to adequately disclose the scope of injunctive relief, the failure to disclosure the size of the settlement fund, the high amount of the attorney’s fee being sought, and disapproving of the release of claims language.
  • Pollard v. Remington Arms Company, LLC, et. al, Case No. 4:13-cv-00086-ODS, United States District Court, Western District of Missouri: after preliminarily approving the settlement arising from claims of design flaws, Judge Ortrie Smith cancelled the final approval hearing out of concern over the low claims submission rate.  The parties were directed to develop a supplemental notice campaign that would be more effective and result in a more significant response rate. Two more “preliminary” approval hearings were held before the judge approved the latest amended settlement agreement. The settlement was finally approved a year and two months after it was originally supposed to have been.  The matter was appealed, costing the parties more time and money.  After all was said and done, the appellate court affirmed the district court’s ruling; however, the claims period was left open for an additional eighteen months.     
  • Shin v. Plantronics, Inc., Case No. 18-cv-05626-NC, Untied States District Court, Northern District of California: Magistrate Judge Nathaniel Cousins denied preliminary approval of a class action stemming from the sell and marketing of defective products after finding the notice was defective, the amount of settlement monies offered was inadequate, and disapproving of the release of claims language. 

Settlement design is critically important as many settlements fail to achieve final approval.  At Risk Settlements, we have developed “best settlement practices” which are used to craft settlements which meet or exceed judicial scrutiny.  In 100% of settlements which we have helped created, Courts have granted final approval and provided the settling companies with a full release of the liability alleged by class counsel. 

What Happens When Settlement Risk Is Not Evaluated, Analyzed or Understood? 

As the settlement is being designed, companies need to assess the risk arising out of the contemplated resolution. Since the financial payout can vary significantly, the settlement outcome can adversely impact liquidity, enterprise value, cash flow, and assets.  Additionally, when settlements go viral, companies face the risk of losing significantly more capital than anticipated, budgeted, or which may be available to pay claims.  Below are some examples of settlements that experienced claim rates significantly higher than statistical models would have predicted:

  • Resort Marketing Group Settlement. Allegations that the company violated the Telephone Consumer Protection Act (TCPA).  This settlement had a potential benefit of $900 per class member from the $12.5 million fund.  Over 2 million claims were filed, causing substantial, additional work by the settlement administrator to verify such claims as valid.
  • Starkist Co. Settlement.  Allegations of slack fill (under-filling of cans).  The $25 settlement benefit generated approximately 2.4 million claims from class members seeking $60 million in class benefit.    
  • Red Bull Settlement. Allegations of false and deceptive labeling and marketing of its drinks.  This settlement provided for a $10 cash benefit or $15 voucher per household.  Publication notice only.  Claimants filed more than 2.7 million claims.
  • Naked Juice Settlement.  Allegations regarding false labeling of products.  The settlement experienced a take rate which was 356% greater than its established $9 million settlement cap.
  • Zirmed, Inc.   Allegations that the company violated the Telephone Consumer Protection Act (TCPA).  This settlement had a 50% take rate which was significantly higher than the parties would have expected.

Without understanding and hedging against the viral settlement risk, companies have no meaningful way to answer the penultimate question — how much will this settlement actually cost the company?  At Risk Settlements, we have developed the science around assessing and providing alternative risk mitigation strategies to hedge against varied and unpredictable outcomes and answer that very question.

How Does a Company Manage Settlement Exposure at a Fixed Cost?

As settlement and risk experts, Risk Settlements designs an optimal settlement structure intended to meet the company’s financial, legal and business objectives.  Then, we perform quantitative and qualitative analytics, using proprietary data and algorithms, to assess the risk arising out of potential resolution models.  The company is then given a full settlement solution which may include risk transfer options using CASI. 

How It Works

CASI is unlike traditional insurance products in that each policy is tailored to the specific class action settlement circumstances and financial needs of the business.  CASI is purchased to transfer the settlement risk in existing class action litigation and coverage is available for the full spectrum of class cases. 

For attorneys likeSeth Hopson, the former General Counsel of North American Power and Gas, Class Action Settlement Insurance changed his company’s entire approach to a large case involving a multi-state class action litigation covering a potential customer class of over 700,000 current and former retail residential customers.

“We were having a hard time agreeing on a range of settlement values with plaintiffs’ counsel. We were at a stalemate as we entered pre-trial discovery, and were planning to take the case to trial, despite the large potential exposure,” Hopson said.

Three years into the litigation, defense counsel suggested purchasing CASI, explaining that the product would provide his company with projections and ideal benefit structures, and sketch out premiums at the various benefit levels. Armed with this term sheet, companies are in a much better place to decide how they want to move forward.

The company’s litigation risk and predicted settlement value are underwritten by a leading national underwriter, which creates a custom policy. There are no other deductibles or self-insurance requirements. Clients get an optimal settlement structure, one that will be accepted by class counsel and the courts, and a way to exit the litigation for a one-time, fixed cost. The policy covers all valid claims made by settlement class members, and can be extended to include third-party costs, such as class counsel fees, and notice and administration fees.

A Tool for Settlement

CASI is a product exclusive to Risk Settlements, a group of former commercial class action litigators, insurance underwriters, private equity bankers, and risk mitigation specialists taking an entirely different approach to class litigation risk.

 

Case Study Download

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