Too much risk: the impact of class action lawsuits on claims made insurance policies: H & R Block, Inc. v. American International Specialty Lines Insurance Co.

• Author: Smith, Sean A.

1. INTRODUCTION

   Class action lawsuits arise in a variety of contexts. While no firm data exists on the total number of class actions filed nationally per year or the types of class actions filed, (2) the breadth of activity that may give rise to a class action lawsuit means that most major American corporations face the prospect of a class action lawsuit. Some of the most commonly asserted types of class action lawsuits are consumer, securities, employment, environmental and products liability class actions. (3) These types of claims are typically insured against by major American corporations. For the indefinite future, a certain class of consumer and securities class action lawsuits are likely to be increasingly filed: suits against financial service companies for misrepresentation, negligence, or breach of fiduciary duty.

   In the fourth quarter of 2008, in the wake of the credit market collapse and the ensuing economic recession, class action claims against financial service companies rose sharply. (4) These class action lawsuits are likely to continue to be filed given the length of time it typically takes class action lawsuits arising from a national practice of a company or companies to be filed on behalf of all potential claimants nationwide (5) and in light of the current national culture, which, similar to the culture during the Great Depression, views those who work for financial service companies as villains. (6) Be cause these suits involve claims of wrongdoing, the financial companies against whom they are brought will invoke their liability insurance policies for coverage.

   During the 1990s, H & R Block, Inc., a financial tax preparer (7) and Kansas City's largest corporation, (8) already faced the types of claims many financial service companies are now facing or are likely to face in the near future. The suits against H & R Block engulfed the company in a dispute with its insurance providers, who provided H & R Block with a "claims made" insurance policy. (9) A "claims made" insurance policy is a commonly issued insurance policy that "insures against claims that are made during the policy period notwithstanding when the occurrence occurred and the harm resulting from the occurrence may have happened." (10) Claims made insurance policies are structured in a variety of ways. (11) H & R Block's insurance policies contained a general provision limiting coverage to claims made when the policy was in effect for acts occurring during the policy period. (12) The policy extended coverage in a specific "[p]rior [a]cts" provision to acts that occurred prior to the enactment of the policy as long as the insured did not have knowledge of the wrongful acts or should have reasonably foreseen that a future claim would be brought against the company. (13)

   The dispute between H & R Block and its excess policy insurers presented the united States Court of Appeals for the Eighth Circuit with an issue of national first impression: does the existence of a series of class action lawsuits prior to the enactment of a claims made insurance policy make it reasonably foreseeable that similar future claims will be filed? (14) The Eighth Circuit's ultimate decision in H & R Block, Inc. v. American International Specialty Lines Insurance Co. will impact insurance coverage of major corporations nationally, in both the narrow context of the upcoming wave of lawsuits against financial service companies and the broader context of any class action lawsuit that invokes liability insurance, such as consumer, securities employment, environmental, and products liability class action lawsuits. This Note argues that the United States Court of Appeals for the Eighth Circuit correctly concluded that knowledge of prior class action lawsuits bars coverage under a claims made insurance policy.

2. FACTS AND HOLDING

   In the late 1980s, the Internal Revenue Service developed and encouraged the online filing of federal income tax returns. (15) Responding to this innovation, the national tax preparer service H & R Block facilitated online income tax filings for its customers. (16) Those H & R Block customers who filed their tax returns online were offered an additional service--an immediate refund by H & R Block. (17) These refunds were actually "short-term loans . . . funded by third party banks," which were later repaid by the actual government refund proceeds. (18) Short-term loans of this type are known as "Refund Anticipation Loan[s] (RALs)." (19) From 1993 to 1996, H & R Block processed more than 15,000,000 RALs. (20)

   In August 1992, H & R Block added additional professional liability insurance coverage to its primary insurance policy. (21) This excess claims made coverage was provided by Evanston Insurance Company (Evanston Insurance) and was renewed annually through August 1998. (22) The excess policy insured prior acts that were wrongfully committed before the enactment of the policy but that were first filed against H & R Block during the insured period. (23) Not covered by the excess insurance were wrongful acts of which H & R Block knew or could reasonably foresee prior to the start of coverage. (24) In 1996, four years after H & R Block first purchased excess claims made insurance coverage, it purchased additional excess coverage from two other insurance providers, American International Specialty Lines Insurance Company (American International) and Lexington Insurance Company (Lexington Insurance). (25) American International's insurance policy covered the period of May 1996 to August 1998. (26) Lexington Insurance's policy covered a shorter period from May 1996 to August 1997. (27)

   In 1990, shortly after H & R Block initially offered its online filing and instant refund service--and prior to the purchase of its excess insurance coverage from Evanston Insurance, American International, and Lexington Insurance--a group of plaintiffs filed the first of what became a wave of class action lawsuits, "asserting a variety of statutory and common law damages claims" (28) centering on the legal concept of misrepresentation. (29) In 1992, after H & R Block purchased its excess coverage from Evanston Insurance, but before it had purchased excess coverage from American International and Lexington Insurance, the second suit seeking class action status was filed. (30) By May 1996, when H & R Block purchased its additional prior act coverage from American International and Lexington Insurance, eleven suits seeking class action status had been filed against the company nationwide in various federal and state courts. (31) At that time, none of the actions had been certified as a class, two of the cases had been dismissed with prejudice, two cases had been settled, and the other seven cases were pending. (32) H & R Block disclosed all of these suits to American International and Lexington Insurance prior to the purchase of its coverage. (33)

   After H & R Block purchased excess coverage from American International and Lexington Insurance, and while its coverage from Evanston Insurance was still active, eleven more suits were filed from May 1996 to August 1998. (34) The most costly of these additional eleven suits was a Texas state wide class action that was settled in 2002, six years from the date it was filed. (35) The settlement provided the plaintiff customers discount coupons for future H & R Block services and, more significantly, for $49,900,000 in attorneys' fees. (36) "Other class action[s] ... filed during the ... period settled for $19.5 million, $881,000, $550,000, $265,000, $22,700 and $250." (37)

   H & R Block sought defense and indemnification from Evanston Insurance, American International, and Lexington Insurance for these cases under its excess coverage policies. (38) The three insurers refused to indemnify H & R Block on multiple grounds. (39) In response, H & R Block brought a diversity action against all three insurers in the united States District Court for the Western District of Missouri, in the jurisdiction where H & R Block is headquartered, (40) "seeking a declaratory judgment that the insurers must defend and indemnify [H & R] Block up to the excess policies' limits for RAL suits filed during the applicable policy periods." (41)

   In an interlocutory order, the district court indicated that Evanston Insurance was obligated to provide coverage. (42) Evanston Insurance's policy was enacted earlier than American International's and Lexington Insurance's policies, and only one class action suit, brought in 1990, had been filed prior to the enactment of coverage. (43) The district court reasoned that the 1990 class action dispute was factually distinguishable from the later suits because the 1990 class action charged that the interest rate on the RAL was miscalculated, which was a technical mistake, and not that the interest rate was misrepresented. (44) Thus, the later suits were not reasonably foreseeable. (45) The court further determined that, even if the 1990 case were factually similar to the subsequent cases, one class action lawsuit was not enough to make a future claim reasonably foreseeable because a single lawsuit only highlighted a local, as opposed to national, issue. (46)

   On a later motion for summary judgment filed by American International and Lexington Insurance, the district court ruled that the insurers were not liable to provide coverage. (47) The court reasoned that H & R Block could reasonably foresee that a claim would be brought for charging excessive interest rates, given the prior series of class action lawsuits brought against it for charging excessive interest rates; therefore, the excess insurance coverage provided by American International and Lexington Insurance did not apply. (48) H & R Block appealed the ruling to the United States Court of Appeals for the Eighth Circuit. (49) The Eighth Circuit upheld the district court's ruling that American International and Lexington Insurance were not...