Crisis Management Coverage Alert:

Toyota Shareholder Class Action Could Result in Significant Exposure for D&O Carriers

Written By Attorneys: Michael A. Hamilton, Joseph F. Bermudez and Suzanne M. Meintzer

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

Although general liability and specialty insurance carriers are commonly called upon to respond to crisis management claims arising out of their policyholders' international businesses, directors' and officers' liability ("D&O") carriers can also face significant exposure for such claims. Indeed, the recent Toyota Motor Corporation ("Toyota") recalls illustrate this potential exposure.

On February 8, 2010, a Toyota shareholder filed a proposed class action lawsuit against Toyota and certain of its officers and directors, alleging that Toyota's stock was exchanged at an over-inflated price as the result of Toyota's failure to advise shareholders of the issues that ultimately led to the recalls. See Stackhouse v. Toyota Motor Corp., Case No. 2:10-cv-00922-DSF-AJW (C.D. Cal. filed Feb. 8, 2010).

In January 2010, Toyota recalled approximately 2.3 million vehicles to correct a problem that could cause the vehicles' gas pedals to stick, and also recalled 4.2 million vehicles to correct a problem in which the pedals could become stuck under a loose floor mat. Toyota then temporarily stopped the production of eight models in five plants across America.

Needless to say, the financial impact on Toyota, its customers, shareholders and insurance carriers will be remarkable.

The Stackhouse action was purportedly brought on behalf of shareholders who owned stock traded on both the New York and Tokyo Stock Exchanges, and alleges that Toyota and its officers and directors failed to disclose a major design defect, and that as a result of this failure, Toyota stock was traded at an artificially high price, reaching as much as $91.78 per share on January 19, 2010. After the recalls were announced, the action alleges, the price per share of stock sequentially dropped to as low as $73.49 on February 3, 2010.

The suit further asserts that Toyota had been receiving incident reports concerning the acceleration system for over a decade and that since 1999, "unintended acceleration has been responsible for 815 crashes, 314 injuries and 19 fatalities in Toyota vehicles . . . ." The suit also claims that Toyota's officers and directors knew about the accelerator problems since at least October 2009.

Several coverage issues are raised with respect to D&O coverage for the international crisis management and product recalls. First, most D&O policies generally do not cover intentionally fraudulent acts-an issue NLdH reported on with respect to the massive Peanut Corporation of America recalls in 2009. Next, as D&O policies are commonly "claims-made" policies, one question will be when the insureds were aware of potential claims and whether those claims were properly and timely reported. That same question will be relevant to whether the claimed losses could constitute "known" losses under the policy.

Another question is whether the impacted D&O policies will provide direct coverage to the directors and officers, or whether the policies will cover corporate reimbursement, or both. Furthermore, based on the scope of recent international recalls, it is likely that primary as well as excess layers will be impacted. Additionally, to the extent punitive damages are at issue, there will be a question as to whether the impacted D&O policies will cover these types of damages.

Of course, every policy contains its own unique terms, conditions, exclusions and endorsements, and no two crisis management and product recall issues are identical. Indeed, some more recently issued D&O policies exclude coverage for shareholder derivative suits brought pursuant to the Securities Exchange Act of 1934-precisely the type of suit at issue in the Stackhouse action. Although the ultimate financial impact of the Toyota recalls upon insurance companies is yet to be determined, one thing is clear-recent international product recalls, like the Toyota recalls, are only increasing.

For the past several years, massive crisis management and product recall issues have impacted insurance carriers. From spinach to ground beef to peanut butter to popular vehicles, insurance carriers continue to face significant exposure for claims arising out of their policyholders' international businesses. Carriers that issue D&O policies are equally impacted by these issues as are their general liability and specialty carrier counterparts. Insurers should continue to closely monitor these issues and develop strategies for addressing potential international claims and exposure.

For further analysis of Crisis Management issues involving international and domestic food contamination/product recalls; trade disruption; supply chain management; brand risk; political risk; terrorism; kidnap & ransom; cyber attack; and other emerging issues such as climate change, nanotechnology or pharmaceuticals in drinking water, please contact Michael Hamilton, Joe Bermudez or Suzanne Meintzer of Nelson Levine de Luca & Horst. NLdH is a nationally recognized leader in representing the insurance industry in all areas, including Crisis Management.