With the number of US lawsuits related to the Volkswagen emissions scandal expected to top 100 by week’s end, and investigations into the company and its executives looming, the “whole gamut of D&O” insurance is likely to be invoked in the case, lawyers say.
And that’s just for the defense of directors and officers at the company, which admitted devices were used to cheat emissions testing in 11 million vehicles worldwide.
Legal damages already forecast to be in the double-digit billions mean that the “tower of insurance will cover a small portion of these, and will be most important for defense,” said William Passannante, co-chair of Anderson Kill’s insurance recovery practice. Even so, “the risk for the tower on the D&O side is exhaustion.”
“If past is prelude, these suits of a securities class action nature, presumably derivative lawsuits and government investigations here and in Europe, all will have to be defended,” he said, adding that he didn’t know the specifics of Volkswagen’s insurance program.
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Two securities fraud class action lawsuits have already been been filed, Advisen data show. The vast majority of all the lawsuits have originated in the US, with most falling under fraudulent trade practices. Excluding intentional acts, the most coverage under D&O applies to securities cases, while trade practices may be covered for defense costs only.
The coverage will defend executives until final adjudication of an underlying wrongful act. It does not pay for regulatory fines, but does cover the cost associated with investigations.
The VW case is unusual in that, “right from the outset, the corporate entity admitted there were irregularities,” Passannante told Advisen. “This is different from a situation in which the corporation and the directors and officers might be aligned.”
There is also the question of whether former Volkswagen CEO Martin Winterkorn–who resigned last week after admitting wrongdoing in the company’s technological processes–will be indemnified by the corporation or have to turn to Side A of D&O coverage, he said.
This section affords “direct” coverage for acts that the company is not legally required to indemnify. Side B covers those it is required to indemnify, and Side C, entity securities.
If Winterkorn, who is under criminal investigation in Germany, does turn to Side A for coverage, and the company settles a shareholder derivative lawsuit in the US, he could find these resources crimped.
That is because, in the US, companies can’t indemnify for shareholder derivative lawsuit settlements, said Joseph Monteleone, partner at insurance defense firm Rivkin Radler. That means those settlements are taken out of Side A of the policies.
And a derivatives suit “based on damages to reputation could be made, without waiting for the exact amount of damages to be assessed,” he told Advisen.
The securities class actions being filed, meanwhile, are likely to be settled for a small fraction of the multibillion-dollar recovery that would have been possible before the Supreme Court decision five years ago.
“In theory, plaintiffs—as some already have—will file wide-ranging securities fraud class actions relating to the company’s emission testing,” said Todd Cosenza, partner at Willkie Farr & Gallagher and chairman of the New York City Bar Association’s Securities Litigation Committee.
But the Supreme Court’s decision in National Australian Bank v. Morrison significantly limits damages in securities class action lawsuits, given that investors “can only recover if the security was purchased or sold in the United States,” he said.
Volkswagen’s stock, of which only about 12 percent is in public hands, is traded mostly on foreign exchanges, with US shares or American Depository Receipts available over the counter.
While shareholders in this country have a “facially very strong securities class action case,” the number of people who can show they bought the company’s ADRs in this country is much smaller, making “the risk in this jurisdiction manageable,” Cosenza told Advisen.
Passannante said that, given the years it will take to unwind all the lawsuits found to have standing in the case, “VW doesn’t know what the the liability picture looks like. The real picture today is defense costs given the magnitude of the potential liability.
“That’s what gives D&O its real value,” he said.
