Posted on 06 Apr 10
Lawsuits triggered by the Toyota Motor Corp. recall could expose issues for directors' and officers' liability carriers, or at the very least challenge exclusions within typical D&O policies.
"There are several ways in which the insurance industry could face issues due to a recall, but a few lawsuits here are of particular note," Michael A. Hamilton, partner and chairman of the National Insurance Coverage Group at Nelson Levine de Luca & Horst, told BestWire.
Earlier this year, a Toyota shareholder filed a proposed class-action lawsuit against Toyota that alleges the car maker's stock was sold at an inflated price because it did not advise shareholders of the issues that eventually led to the manufacturer recalling more than 2 million vehicles to correct sticking accelerator pedals. Several other similar lawsuits are pending, Hamilton said.
"We don't know what insurance Toyota has. What is interesting here is that the suit is not alleging mismanagement or negligence, but that the company knew of the problem and intentionally ignored it in the name of safety and profits," said Hamilton, who added many policies carry an exclusion against intentional conduct or intentional fraudulent acts.
Carriers may have to pay for the defense of corporations in these types of cases, but if there is a finding of fraud, insurers are typically not liable for indemnification, Hamilton said. "Companies can get the defense, but it stops there," he said. "Insurers aren't going to pick up the tab once fraud has been determined."
Depending on the policy language, if insurers do find that they were defending known fraudulent behavior, they could seek reimbursement for the defense, Hamilton said.
The question of when Toyota knew about the mechanical issues in question could determine if carriers are responsible at all. While a general liability policy can cover incidents that might have occurred 20 years ago -- as in environmental cases, for instance -- D&O policies are "claims-made" policies. This means a claim must be made within the policy period for coverage. If a company knows about a claim or about the possibility of a claim, insurers can deny coverage, Hamilton said.
Following the recalls, A.M. Best Co. said the financial strength rating of A- (Excellent), issuer credit rating of a- and stable outlook of Toyota Motor Insurance Co. are unchanged (BestWire, Feb. 9, 2010). In light of the recent recalls surrounding Toyota Motor Corp., the ultimate parent of Toyota Motor Insurance Co., A.M. Best remains neutral and will monitor the developments of the situation on an ongoing basis.