Runoff Reporting Risks, D&O Settlement Exposure and Pixel Tracking Claims

Intro (00:00):

You are listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

Mike Radak (00:09):

Hello everyone. Thanks for joining us for today's episode of Alliant Specialty's Claims and Legal podcast where we highlight important legal developments in the financial lines insurance world.

Today I'm joined by Peter Kelly, one of the claims attorneys on our specialty claims and legal team, as well as by David Finz, who's going to tell us about some new and exciting cyber developments. Peter's going to kick us off by discussing a federal court decision out of Illinois that addresses some important issues on pitfalls involved with reporting claims, specifically when there's a runoff period and a post-policy extended reporting period involved. I'll be talking a little bit about a recent case discussing a carrier's refusal to accept a reasonable settlement offer. Then we'll hear from David about new developments in pixel tracking litigation.

As always, if you'd like to read more about what we talk about today, please check out our monthly Executive Liability Insights newsletter. Peter, I'll turn it over to you to kick things off.

Peter Kelly (01:12):

Thanks, Mike. Providing timely notice of a claim may seem mundane, but it is fundamental and is likely the single most important step in triggering coverage in the professional liability policy. Every single policy that you read is going to set out specific and strict reporting requirements, including a defined reporting window. It may sound straightforward, but we routinely see coverage disputes that arise at this very first and often fatal stumbling block. It's really essential that insureds, brokers, risk managers alike, everybody understands fundamental timely notices, particularly under a claims made and reported policy where courts will strictly enforce those reporting requirements as written.

A recent decision involving a lawyer's professional liability policy is going to help us illustrate that point. For background, the law firm was sold. As part of the transaction, one of the firm's partners executed a promissory note in connection with the sale. Years later, the lawyer was accused of defaulting on the note and was sued for fraud. The timeline here is important. They were sued in February of the policy period year, and the policy was originally set to expire in June. However, the firm's professional liability policy was placed in a runoff in May.

By endorsement, that original expiration date of the policy was replaced with the shortened expiration date. It is a little unclear from the details of the case, but I think they were likely maybe winding down so put their policy in runoff. They also purchased a 24 month extended reporting period along with that runoff. When the policy was placed in a runoff, it included the following definition of an extended reporting period: the period of time after the end of the policy period for reporting claims that are first made against the insured during the applicable extended reporting period by reason of an act or remission that occurred prior to the end of the policy period and is otherwise covered by this policy. When you hear that, it doesn't sound super straightforward, so what does that mean?

Senate reporting periods do not simply provide extra time to report known claims. Instead, they apply only to a narrow category of claims. Those that are first made after policy expiration but arised from wrongful acts that occurred before expiration. So in other words, extended reporting periods cover newly-made claims after expiration. They do not create a grace period for late reporting of claims already made. So, although here the lawsuit alleging fraud arising out of the sale of the firm was served during the policy period before the runoff expiration date, that meant it had to be reported no later than the runoff expiration date to trigger coverage. They actually missed both the original and the shortened reporting deadline, so they were kind of well over their skis on that. Because the claim was first made before expiration and reported afterward, coverage was barred.

The court held that untimely notice under a claims made policy is fatal to coverage often, as was the case here in Illinois, regardless of prejudice to the insurer. This is a harsh but well-established reality of claims made insurance, and it really just reminds us that noticing a claim is not a technicality, it is a condition precedent to coverage. It also reminds us that extending reporting periods, although that phrase might lead you to believe otherwise, does not rescue late notice of already made claims. It only covers those very specific subset of claims. When the decision is made to place a policy into runoff, it is extremely important that insureds need to audit all pending demands, lawsuits, anything that's out there and get their ducks in a row before they go ahead and place that policy in runoff because it could have dire consequences.

Mike Radak (04:36):

Thanks, Peter. That's another great example of the critical importance of timely reporting under the policies and understanding what exactly the policy language requires as far as reporting new claims. Definitely one of the most frustrating things we deal with in our claims world is late notice issues and trying to work around those when we can. Generally the courts do not give us much favorable law to work with on that, so timely reporting is such a critical component of what we do and critical area that we try to educate our clients on.

I'm going to talk briefly about another case that came down from bankruptcy court in Texas where the court essentially determined that the settlement offer presented to a D&O carrier was a reasonable settlement demand. The court could not compel the carrier to accept it, but simply warned them that there are potentially dire consequences of their refusal to settle. In this case, the insured filed for bankruptcy. There was a dispute with the bankruptcy trustee and the insolvent insured with respect to the value of remaining assets, physical assets that the insured held.

Prior to this dispute, there was litigation against the directors and officers of the insured where they were sued for fraud, fraudulent concealment and civil conspiracy. The trustee filed the lawsuit to freeze distribution of insurance proceeds from that prior litigation to resolve its own claims against the directors and officers. The trustee made a settlement demand within the policy limits to settle the claims for failing to protect the assets, the physical assets. The carrier was asked to accept that demand but declined to do so and basically stated that the settlement requires the carrier's prior written consent. The policy also says that that consent shall not be unreasonably withheld.

The court determined that the carrier failed to properly consider the cost of litigation in conjunction with the potential liability when evaluating the reasonableness of the demand, and that the demand made on the insurance carrier was reasonable. The court went on to say that they cannot compel them to accept the demand, but failing to do so exposes the insurer to potentially limitless liability. There is extra contractual remedies available under Texas law and some other jurisdictions where if an insurer refuses a reasonable settlement demand and there's an adverse verdict found in favor of the party making the demand, the insurer could be liable for not just its policy limits, but basically unlimited funds excess of the policy limits.

It's another reminder that if insurance carriers need to carefully consider refusing to accept a reasonable settlement offer for otherwise covered claims, as their failure to do so can create significant exposure outside of just the policy limits. This case gives us a little more ammo to push back on insurance carriers that are refusing to settle matters when they have a reasonable settlement demand before them. With that, I'm going to turn it over to David. You can tell us a little bit about developments in the pixel tracking litigation.

David Finz (07:47):

Thanks, Mike. I'm going to be returning to a certain type of privacy claim that has gotten an awful lot of attention lately. It goes by different names, whether you call it website tracking, pixel tracking, unauthorized or wrongful collection. These are the claims that have been tying up the courts and have been filling up defendant's email with demand letters. We have a pretty significant development in a proposed class action in North Carolina.

As reported this week by Law360, the plaintiffs have agreed to settle with a clinical testing company. I will not name them here. The terms of the settlement have not been disclosed, but over the next several weeks, the parties have agreed to come up with essentially a roadmap that will lead to the ultimate dismissal of this proposed class action. What bears noting here is that the settlement comes after the court denied the defendant's initial motion to dismiss. Now, in denying that motion, the court noted that this did not necessarily connote that the plaintiff's claims would prevail at trial, only that they made out a claim for which relief could be granted.

Now, as I've noted in some of our prior discussions around pixel tracking litigation, the underwriters have been all over the map uncovering these types of claims. Some are willing to cover them both in terms of defense and indemnity, subject to a sub-limit. Some are willing to offer full limits conditioned on evidence that certain controls are in place. Other insurers are limiting their coverage to defense costs. Some are basically not covering these claims at all, perhaps with certain carve backs in situations where the control group, basically the C-suite at the insured, was not aware of the tracking practice in a particular situation. What this tells me is that the development here around this settlement underscores the importance of getting at least defense coverage for these claims. The importance of that cannot be overstated.

As a claims person, I can't get a foot in the door to talk about a cost of defense contribution to a settlement with the adjuster if our client doesn't have coverage for defense costs in the first place. Now, we don't know the specific terms here of the settlement, but what we do know just from a common sense standpoint is that somebody on the defense side, defense counsel in consultation with their client, apparently came to the conclusion that it was more cost efficient to settle this claim than to litigate it given the cost and the uncertainty of the outcome.

Again, we don't know whether there's insurance coverage in play here, but assuming that there is, we can't begin to have a conversation about settlement if we don't at least have those defense costs covered. The adjuster can make a business decision at that point, even if they have a stated wording in the policy that they're not going to cover anything but defense costs to essentially hold their nose and agree to contribute to a settlement because an adverse judgment simply would not make sense. It makes more sense to them to make the claim go away.

It's very important for our clients if they have any kind of public-facing website and they transact business in certain jurisdictions that seem to be prone to this type of litigation such as California, where these claims are very common, to know what the coverage terms are and how their policy would respond in event of a claim such as this hitting them. With that, I'll turn it back over to you, Mike.

Mike Radak (11:20):

Thanks David. The amount of pixel tracking and website tracking claims that we've been seeing continues to grow at a pretty good clip. Super helpful and important information that you just gave us about how the policy responds or doesn't respond in the instances where one of our clients gets hit with a demand letter or a lawsuit related to their website tracking. Anybody that has a website with a place of business in California is getting hit with some of these. Routine plaintiffs seem to just be going down the list and sending out demand letters with respect to tracking. Definitely something important for our clients to keep in mind.

With that, I'll say thanks to David and Peter for their contributions today. Thanks for everyone that tuned in to our podcast today. As always, if you'd like to learn more on some of these recent developments that we just talked about, please reach out. You can subscribe to our Executive Liability Insights monthly newsletter by contacting one of us, and we can get you added to the list. If you'd like more information about Alliant and a more rewarding way to manage your risk, please reach out for more info or visit our website at www.Alliant.com. Thanks.