Liability insurers are sometimes faced with a difficult scenario: Their insured has been sued in a class action with potentially large stakes. The insurer believes they have no duty to defend and a denial of coverage is appropriate. But the result of declining to defend the insured is likely to be a “collusive” class action settlement in which the named plaintiffs, on behalf of the class, agree to a large judgment, with only a relatively small portion of it (if any) collectible against the insured, and the remainder collectible only against the insurer that has denied coverage. A likely scenario where this type of scenario may occur is where the insured has little assets in comparison to the potential liability. The insurer may be confident that its denial of coverage will be upheld. But it cannot be certain of that. And if a court rules that coverage exists, the insurer could be stuck with a very large class action settlement, unless it can challenge the appropriateness of that settlement.

One approach an insurer can take in this scenario is move to intervene in the underlying class action. That motion, however, may need to be filed early in the case, according to a recent Seventh Circuit decision. In CE Design Ltd. v. King Supply Co., No. 12-2930, 2015 U.S. App. LEXIS 11117 (7th Cir. June 29, 2015), the plaintiff filed a class action under the Telephone Consumer Protection Act (“TCPA”) against King Supply, which was insured under CGL and commercial umbrella policies. The insurers denied coverage based primarily on exclusions for TCPA claims. After class certification, King Supply agreed to a $20 million settlement (the policy limits), with only $200,000 (1% of the judgment) executable against King Supply. After the proposed settlement agreement was filed, but before it was approved, the insurers moved to intervene in the case. They also sought a declaratory judgment on coverage separately in a state trial court, and eventually prevailed.

The district court held that the insurers’ motion to intervene was untimely, and the Seventh Circuit affirmed. Judge Posner’s opinion for the Seventh Circuit concluded that the insurers “should have begun worrying when the suit was filed rather than almost three years later” because “[a]lmost all class actions are settled, and . . . a class action settlement may be the product of tacit collusion between class counsel and a defendant.” Id. at *7. Judge Posner wrote that “[a] prospective intervenor must move to intervene as soon as it ‘knows or has reason to know that [its] interests might be adversely affected by the outcome of the litigation.’” Id. at *9-10 (citation omitted).

Judge Posner’s opinion further noted that “even if the insurers had filed a timely motion to intervene, their interest might well have been deemed too contingent on uncertain events to justify granting their motion.” Id. at *11. Judge Posner suggested that insurers might be better off either defending the insured under a reservation of rights, or simply relying on their declaratory judgment action to vindicate their rights. Judge Hamilton wrote a concurring opinion concluding that the insurers lacked the type of interest that would justify intervention because their rights were contingent on whether their coverage decision was correct.

So what is an insurer faced with this quandary to do? Defend under a reservation of rights and incur substantial class action defense costs until the coverage issue is resolved in a declaratory judgment action (if the court will decide that before the underlying case is resolved)? Move to intervene early in the underlying action to protect against a collusive settlement? Or play the odds that the coverage decision will ultimately be upheld? Not an easy call to make. But intervening later in the case is unlikely to succeed, at least in the Seventh Circuit.