Claims expert warns EU risk managers to prepare for more consumer lawsuits

The EU Class Actions Directive will soon be implemented across Europe and will inevitably lead to more consumer lawsuits and insurance claims, according to Andreas Oevermann, senior claims adjuster/in-house counsel, claims, legal and compliance at Newline Europe Versicherung. Errors and ommissions (E&O) and D&O claims are likely to be most affected by the new system when it comes into force across the EU next year. Collective claims under the GDPR and product recalls are also likely areas of focus for consumer groups, said Oevermann, in an article published in Newline Europe Versicherung’s latest newsletter. It remains unclear exactly how countries will adopt the directive, which is open to interpretation by EU member states. This will lead to inconsistencies across Europe, giving both risk managers and their insurers significant headaches. So-called ‘forum shopping’ is likely under the new regime. “If the willingness of consumers to sue increases with the introduction of class action lawsuits, the litigation risks for companies will increase to the same extent. New options for handling lawsuits in a process- and cost-optimised manner, for example via legaltechs, or the question of how litigation financiers are involved, increase the risk for companies of being sued more frequently in the future,” said Oevermann. Member states have until December to amend their domestic law to meet the minimum requirements under the EU directive, which was adopted in late 2020. The directive is applicable to 66 harmonised consumer-focused European legal acts. The new rules apply to infringements of EU law harming the collective interest of consumers beyond general consumer law. It covers a wide range of fields such as data protection, product liability, financial services, travel and tourism, energy, telecommunication, environment, health, and air and rail travel. The core aim is to create a minimum level of comprehensive protection for EU consumers within the internal market, explained international law firm Herbert Smith Freehills in a recent note. A key element of the regime is that only so-called qualified entities (QEs), which are designated by member states, can bring actions on behalf of consumers. QEs will have to comply with criteria on independence and transparency, operate on a non-profit basis and act for consumer interests. Alongside domestic actions, QEs can file cross-border representative actions in other member states. QEs from different member states can also join forces and sue a defendant in a specific, and likely more favourable, local court, said Herbert Smith Freehills. “The directive mandates that representative actions seek at least two types of remedies, injunctive measures and redress. The former includes provisional or definitive orders to cease an infringement, and can be granted without proving any actual loss of any individual consumers or fault by negligence of the trader. Redress covers a range of remedies such as compensation, repair, replacement, price reduction, contract termination and reimbursement but, crucially, not punitive damages,” it explained. Member states are free to choose whether to allow opt-in or opt-out models for representative actions. Rules will be required on how and at what stage of the proceedings individuals can express their decision to be part of the action. There are a number of areas in the directive designed to help prevent a US-style class action free-for-all in Europe. National courts, for example, will be entrusted with powers to dismiss unfounded cases at early stages. The directive also adopts the "loser pays" principle, ensuring the defeated party pays the costs of litigation, creating incentives against abusive lawsuits. “However, member states must ensure that costs do not prevent QEs from exercising their rights, likely via means such as legal aid or capped court fees,” said Herbert Smith Freehills. “In another sign of the EU being wary of the excesses of US-style claims, the directive allows group actions to be funded by third parties such as litigation funds, but limits its use, stating that outside funding must not divert the action ‘away from the protection of the collective interests of consumers’,” continued the law firm. Oevermann said the main question for risk and insurance managers, as well as their insurers, is what effects the introduction of class action lawsuits will have on D&O/E&O and product liability lines of business. The claims expert said D&O insurance should not be affected superficially, since the lawsuits are likely to be directed against the company and not against the managers. “However, D&O cases can arise in the aftermath of a class action lawsuit if the sued company makes claims for recourse against the manager because their actions were in breach of duty – i.e. the managers are accused of a breach of duty that is said to have triggered these claims for damages,” said Oevermann. “A different situation can arise… if the company's D&O insurance contract includes an ‘own damage’ clause. It is then possible for the company to receive the damage directly from the insurance company if the clause requirements are met (e.g. the manager has been released or exonerated) without having to first recover this damage from the manager. In some cases, it is also possible that a Side-C coverage exists, which directly protects the company in the event of insurance claims relating to trading in securities,” he continued. E&O and product liability insurance could be more directly impacted by lawsuits under the new directive, believes Oevermann. “In particular, the GDPR can now also become significant for insured companies from a civil law perspective. If it was previously the fines that were a nightmare for companies violating the GDPR, it may now be the consumer lawsuits that pose a great danger. Although the monetary benefits awarded in individual cases as part of a claim for damages under the GDPR are small for the individual consumer and therefore manageable for the company, if these sums are multiplied by a large number of plaintiffs, the loss of a class action lawsuit can cause major financial damage for some companies,” he explained. Oevermann also pointed out that the protection of consumers in financial and investment services is expressly mentioned in the directive’s recitals and will present new challenges for the sector. Liability for defective products is also mentioned in the directive’s appendix as a possible subject for EU class actions. So, the manufacturing industry and its insurers will have to keep a close eye on developments, advised Oevermann. Another danger for risk and insurance managers is the problem of forum shopping, argued the claims expert. “This means that the institutions entitled to sue can look for a court location that is advantageous for them and which has awarded larger claims for damages in similar cases. The legal structure in the individual countries will also lead to the qualified institution looking for a favourable place of jurisdiction. This will pose a challenge for the companies’ legal departments and the advising lawyers, because the aim of harmonising consumer protection will probably not be achieved by the directive. Rather, competition between the legal systems is to be assumed,” said Oevermann. “Practise will show whether and how the new legal action will be accepted and what effects the EU class action lawsuit will have on companies and the insurance industry behind it. However, it is to be expected that there will be more consumer lawsuits in the future and that the costs for the (insurance) industry will rise,” he concluded.