Tapping Insurance Proceeds in Class Actions

Settling complex class action lawsuits frequently requires the consensus not just of corporate directors and officers, but also their primary and excess insurers, as standard directors and officers (D&O) policies prohibit the insured from admitting or assuming any liability without the prior written consent of the insurer.

This provision, intended to reduce the moral hazard of an insured shopping for his or her release with a blank check, thereby protecting insurers from expedient but unreasonable settlements, generally results not only in the insurer’s sign-off privileges, but an active seat at the table during settlement negotiations and mediation. But what happens when the insurer disclaims coverage and refuses to enter the fray? In this situation, individual defendants are often left to fend for themselves, but they are not without options. An arguably covered defendant may extract some value without first litigating against the insurer, but doing so requires threading the needle of optimal settlement drafting, court approval, and third-party objections.