With growing frequency, firms are coming below fireplace for adjustments in buyer loyalty applications, a lot of which happen with out warning or recourse. Whether or not it’s a persistent devaluation of miles or factors, arbitrary expiration dates or another perceived lack of worth, prospects and regulators have gotten more and more discontent with applications which might be touted as an added worth to repeat prospects.
A latest instance of discontent materialized on September 5, 2024, when the US Division of Transportation launched an inquiry into the 4 largest US airways’ rewards applications. In accordance to DOT, the investigation targets potential unfair, misleading or anticompetitive practices within the operation of the airways’ frequent flyer applications. As a part of the probe, DOT despatched letters to American Airways, Delta Air Strains, Southwest Airways and United Airways ordering them to offer data and submit stories with details about their rewards applications, practices and insurance policies. In keeping with DOT, the probe “is concentrated on the methods shoppers collaborating in airline rewards applications are impacted by the devaluation of earned rewards, hidden or dynamic pricing, further charges, and decreased competitors and selection.”
Different firms in different enterprise sectors have additionally been focused for adjustments to the phrases of their loyalty applications. In September 2022, the Federal Commerce Fee sued pesticide producers, Syngenta Crop Safety and Corteva, Inc., alleging that they used loyalty applications to limit competitors. Equally, Staples, Inc. settled a category motion lawsuit filed towards it in 2016 for allegedly deceptive shoppers in reference to its rewards factors. See Torczyner v. Staples, Inc., 2017 WL 6549937, at *1 (S.D. Cal. Aug. 28, 2017). Given these examples, it’s affordable to count on enforcers to proceed their give attention to perceived unfair and misleading practices involving client loyalty or rewards applications.
Luckily, firms could discover reduction from the monetary burden these investigations or lawsuits could convey below their current strains of insurance coverage. A number of strains of economic insurance coverage could also be implicated. First, lawsuits or investigations alleging wrongdoing by the corporate and its executives could implicate protection below administrators and officers’ legal responsibility insurance policies. Usually, D&O insurance policies defend firms and their insured executives towards claims alleging “wrongful acts,” which embody claims of mismanagement, breach of fiduciary duties or different injurious acts. Coated claims below D&O insurance policies could embody the prices of governmental investigations regarding alleged wrongdoing by the corporate and its managers, even within the absence of a ensuing lawsuit or enforcement motion.
Second, lawsuits alleging wrongdoing associated to an organization’s loyalty program could also be coated below the corporate’s errors and omissions coverage. E&O insurance policies normally cowl claims towards the policyholder for alleged errors within the rendering {of professional} companies that triggered harm to a different particular person. It’s doable that the prices from a negligence lawsuit alleging design and implementation flaws of a rewards program could also be coated below the corporate’s E&O coverage. A key consideration within the evaluation could be whether or not facets of this system design and its administration software program required the specialised ability and data typically current in actions implicating E&O insurance policies.
Third, lawsuits involving loyalty or rewards applications could implicate business normal legal responsibility insurance policies which, along with protecting liabilities arising from bodily damage and property harm, cowl sure forms of private and promoting accidents. Thus, a client lawsuit alleging damages regarding deceptive promoting of a loyalty or rewards program could also be coated below the non-public and promoting damage coverages which might be sometimes discovered below “Protection B” of most normal legal responsibility insurance coverage insurance policies.
Lastly, loyalty program claims could also be coated below an organization’s cyber insurance coverage coverage. For example, many cyber insurance policies comprise media legal responsibility and expertise companies protection. Media legal responsibility protection insures loss ensuing from a “Media Wrongful Act” which can be outlined as “any precise or alleged act, error. . . or breach of obligation dedicated by an Insured in reference to the dissemination of” the insured’s media content material. The Media Wrongful Act sometimes should lead to “unfair competitors or unfair commerce practices” and have to be alleged along with different offending conduct. Equally, expertise companies legal responsibility protection insures towards loss ensuing from the rendering of expertise companies. In flip, expertise companies could possibly be outlined as companies rendered in “the efficiency of offering a expertise platform.” Thus, claims alleging wrongdoing in regards to the content material disseminated by an organization about its loyalty program could implicate media legal responsibility protection below cyber insurance policies. Likewise, such claims could implicate expertise companies legal responsibility protection if, for instance, they allege wrongdoing regarding an organization’s expertise platform for the loyalty program.
Finally, the language of every firm’s insurance coverage insurance policies, the forms of protection procured and the particular allegations in a lawsuit or investigation will dictate the scope of protection obtainable for claims involving an organization’s buyer loyalty program. It can be crucial for firms to grasp the scope of protection below their insurance policies and put together to say their rights within the occasion of a declare or investigation.
That is an excerpt from Hunton Andrews Kurth LLP’s Scorching Matters for Retail CGs–Fall 2024 e-newsletter. A replica of the total e-newsletter may be obtained by contacting Phyllis Marcus.
