Approving the Filing of a Class Action and Implications on D&O Insurance

 

Introduction:

A recent Supreme Court judgement handed down on 6 May 2010 (C.M. 8761/09 Fatal v. Cellcom), may have a dramatic effect on Class Action suits filed in Israel and as a result, on liability policies such as a D&O liability policy, which provides coverage for such claims including also coverage for the legal expenses incurred in the defence against  them.

The Tel Aviv District Court approved the filing of a Class Action against the defendant –  a large Israeli cellular phone company in the framework of which it was alleged that the defendant illegally billed its clients for sending them via mail a detailed account of the calls they had made.

The Supreme Court declined a motion to file an appeal on the decision which approved the filing of a class action setting out the criteria based on which the Court of Appeals should decide what is the proper timing for discussing an appeal on a motion approving the filing of a Class Action.

 

Background:

The Israeli Class Action Law – 2006 (hereinafter: the Law) stipulates that the handling of a claim as a Class Action requires the approval of the Court (clause 3(b) of the Law).

Clause 8(a) of the Law details a list of criteria which should be fulfilled in order for the Court to approve the filing of a Class Action lawsuit.

Clause 8(d) of the Law stipulates that the Court’s decision to approve or deny a motion to approve the filing of a Class Action may be appealed subject to receipt of the Court’s approval to file such an appeal.

The question which arose was whether a defendant’s allegations against the Court’s decision approving the filing of a Class Action against it should be discussed after the decision to approve it is handed down, or whether these allegations should be discussed after the Class Action itself is discussed and concluded.

 

The Supreme Court’s Ruling:

The Supreme Court stated that discussing the defendant’s allegations immediately after the approval of the filing of a Class Action against it may be ineffective considering the following factors:

(a)     The Class Action may conclude in a settlement agreement or in a judgement denying the Class Action and an appeal may therefore eventually turn out to be irrelevant.

(b)     The Court of Appeals might find itself discussing the same allegations twice – first when discussing an appeal on the motion to approve the filing of a Class Action and second when discussing an appeal on the ruling in the Class Action itself.

(c)     The discussion on the appeal will automatically delay the discussions on the Class Action itself.

The Supreme Court therefore suggested that the Court of Appeals review three criteria when determining the proper timing for filing an appeal:

(a)     The implication the acceptance of the Class Action may have on the defendant – in this respect, the Court should consider the claim amount and the financial stability of the defendant.

(b)     The weight of the questions which should be discussed in the framework of the appeal as compared to the weight of the questions which remain to be discussed in the framework of the Class Action – in this respect, if the questions raised in the framework of the appeal are relatively simple, whereas the questions which remain to be discussed in the framework of the Class Action itself are complicated, the Court will tend not to postpone the hearing of the appeal.

(c)     The chances that the appeal will be accepted – obviously, the higher the chances are, the more the Court will tend not to postpone the hearing of the appeal. However, the Supreme Court stated that this criteria is difficult to apply and should therefore only be used in extreme circumstances.

In this specific case the Supreme Court denied the appellant’s motion to appeal a decision approving the filing of a Class Action against it, determining that the appeal may be filed after the discussion in the Class Action itself will be concluded.

 

Possible Implications:

Obviously, the implications of the above decision will become clearer in the future, pending the manner in which the criteria set out by the Supreme Court will be applied.

Nevertheless, it can be assumed that this decision will affect the number of Class Action lawsuits which will be approved and discussed by the Israeli Courts.

In recent years we have seen an increased number of Class Action claims filed against D&Os, mainly relating to securities, especially following the recent worldwide financial crisis.

D&O liability policies provide coverage for such claims and determine that the insurers of these policies have a duty to advance payments on account of the D&O’s legal expenses.

Until the recent Supreme Court decision, D&O liability insurers had to take into account the legal expenses which would be incurred until the handing down of the decision as to whether or not to approve the filing of a derivative action.

 

It appears that pending the manner in which the recent decision will be applied, D&O liability insurers will further need to consider the legal expenses involved in defending against the Class Action itself.