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CHICAGO-Class-action lawsuits clearly will remain a concern for risk managers in the years ahead, with suits emerging from new areas.
Pension administration and employment practices issues will be among the new sources of class action litigation in the near future, predicted some panelists at this year's Harold H. Hines Jr. Memorial Symposium.
Meanwhile, institutional investors will more frequently take the lead role in securities class actions.
The subject of this year's Hines symposium, held last week in Chicago, was "The Use and Abuse of Class Action Lawsuits," with the panelists predicting future trends in class-action litigation, examining the existing environment and discussing situations where class actions are merited, as well as cases in which they are not.
"In the security field you will see more institutional investors taking up the cudgel and representing individual investors," predicted panelist Lowell Sachnoff, a senior partner with Sachnoff & Weaver in Chicago.
Mr. Sachnoff suggested that over the next five years those institutional investors will increasingly determine that they have an obligation to their individual members to take that lead.
Brian O'Hara, president and chief executive officer of Exel Ltd. and chairman and CEO of its X.L. Insurance Co. Ltd. subsidiary in Hamilton, Bermuda, predicted that in the near future, many plaintiffs attorneys now active in product liability class-action work will begin taking up employment practices actions.
"I think this is an extremely fertile field for the plaintiff bar," Mr. O'Hara said, predicting they will take the case of a few employees and use "junk science" to create the appearance of discrimination against an entire class.
"I think there's going to be an explosion of employment-related suits, particularly in light of Texaco," said Mr. O'Hara, referring to the $176.1 million settlement Texaco agreed to last year to settle a race discrimination suit brought by African-American employees.
In that case, Mr. O'Hara said, "this thing was basically manufactured" and forced an unusually large settlement, especially with a "hostile press" acting as the "handmaiden" of the plaintiffs.
Plaintiffs class action attorney Arthur Susman, a partner at Susman, Buehler & Watkins in Chicago, said that if he was a risk manager, "I would look at my pension plan" as a possible class-action exposure.
Mr. Susman suggested class actions are a necessary way of addressing certain claims.
"If you think class actions are going away, they're not," he said.
"We're a complex, litigious society with limited judicial resources. It's just the way things have to happen since we're no longer an agrarian society and have 250 million people," Mr. Susman said.
Steven Gilford, a partner with Mayer, Brown & Platt in Chicago who moderated the discussion, described a class action as "a procedural device for resolving a lot of claims at the same time.
"Sometimes that's really helpful to a company, and sometimes that's a curse," he said.
A class action can benefit a company by providing a way to resolve mass torts that couldn't be settled if it required dealing with thousands of lawyers in thousands of individual courts, Mr. Gilford said.
On the other hand, they also can create situations in which a number of tiny claims so small they never would be filed individually are built into a single claim suddenly posing a multimillion-dollar exposure for a company.
Mr. Sachnoff, who represents both plaintiffs and defendants in securities litigation, suggested, "There are many instances where the mere threat of a class action acts as a deterrent effect on managers who might otherwise attempt to push the envelope into something that would be illegal."
Class actions also can provide a way of compensating small shareholders with a legitimate claim who might never recover damages without the involvement of the large shareholders often responsible for bringing a case to court, he said.
Donald Sullivan, vp-risk management at Deerfield, Ill.-based Baxter International Inc., agreed that class-action suits are not going to stop, and he suggested risk managers need an "early detection system" for potential class-action litigation.
"Typically when a class action happens it's not a surprise," Mr. Sullivan said.
Usual warnings include a loss affecting a large number of people or negative publicity. "In the worst case it's been on '60 Minutes,'*" he said. "At this point, if you haven't done your homework, you're in trouble."
His advice to risk managers would be to "insert yourself into the process," the Baxter risk manager said, "be bold" and communicate with top management and the company's insurance company and manage the entire litigation process.
A company facing a class action suit should assemble a litigation response team that includes risk management, corporate communications, the company's legal department, senior management, the company's insurance broker and outside counsel, Mr. Sullivan said.
"The communication has to start early in the process," he said, adding that hopefully the company already has discussed the potential for a class action with its excess liability carrier during renewal.
Stressing the importance of working closely with the insurer, Mr. Sullivan said Baxter rarely has gone to its insurer with a proposed settlement and seen the insurer refuse to settle if the settlement was reasonable. "Normally they just tell you to do whatever you think is best," he said.
In working with X.L., Mr. Sullivan said he thinks the philosophy has been "first we battle the plaintiffs and then we resolve the coverage issues."
The risk manager added that Baxter always selects its outside counsel in class-action cases, "and we have not had a problem with our insurance carriers in doing so."
Mr. O'Hara said X.L. tries to work closely with policyholders facing class actions, not just to reimburse them for their loss, "but hopefully to develop a strategy to minimize the ultimate cost."
"Even if it consumes our entire level of insurance we'd hope we could provide them a helpful service so it wouldn't go through all their other insurance," Mr. O'Hara said.
"One of the things we've learned is that the plaintiffs will try to divide and conquer," he said, suggesting the plaintiffs will try to separate the interests of the policyholder from those of the insurance company.
X.L. tries to "circle the wagons," and keep all the parties focused on their common interests, he said.
"My experience is the insurance carrier and their attorneys are vital members of the team," Mr. Sachnoff said.
Obviously the insurer is involved by paying defense costs, he said, but beyond that its input can be essential to providing the best defense.
Questioned as to whether lawyers take on class actions for the money, Mr. Susman said the current attack on attorneys' fees is "The attorneys received $5 million and I'm getting $6."
"If the attorneys are getting $5 million, chances are there was $25 million made available to the class," he said. "That's what class action's all about."
Although there are "reprehensible settlements where lawyers give up their fiduciary duties for a fee," Mr. Susman said those are rare, and he noted all settlements and attorneys fees in a class action must be approved by the court.
In addition, while they often seem like a great deal of money, with fees usually set as a percentage of the recovery "there is a huge risk involved," both in the attorney's capital and time, he added.
Mr. Susman cited a case he has been working on for nine years that is only now about to go to trial.
"If I win, I expect to be paid handsomely for taking the risk involved," he said. "Everything is on a contingent basis."
The annual Hines Symposium honors Harold H. Hines Jr., former president and CEO of Rollins Burdick Hunter Co., now Aon Group Inc. Kathryn McIntyre, publisher and editorial director of Business Insurance, opened the program, which was presented by the Chicago and Northeastern Illinois chapters of the Risk & Insurance Management Society Inc., the Insurance School of Chicago and Business Insurance.