On July 26, 2022, Judge Robert W. Gettleman of the United States District Court for the Northern District of Illinois Eastern Division granted in part and denied in part a motion for summary judgment in a securities fraud class action against an insurance company (the “Company”) and certain of its executives. In re The Allstate Corp. Sec. Litig., No. 16-C-10510 (N.D. Ill. July 26, 2022). Plaintiffs alleged that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, by making material misstatements and omissions regarding a spike in the frequency of automobile policy claims, which plaintiffs alleged had a negative impact on the Company’s financial condition and stock price.

According to the complaint, the Company implemented an aggressive strategy to grow its auto insurance business in 2013, which plaintiffs contend included loosening its underwriting standards. Plaintiffs alleged that at the time of implementation, the Company noted that the strategy could cause “some pressure” on the “frequency” of automobile policy claims, which they would “closely monitor.” On October 29, 2014, the Company announced purportedly strong financial results for the third quarter that ended on September 30, 2014. The next day, during an earnings call with securities analysts, defendants allegedly addressed the potential effect of low gas prices on claim frequency. Specifically, the complaint alleged that one of the individual defendants stated that he did not “have much to add as far as the gas price impact,” that “our frequency so far has been extremely favorable to the prior year,” that it was “within our historical ranges,” and that “frequency trends . . . have been good.” Plaintiffs alleged that this statement was false and misleading because the frequency of claims had allegedly already increased beginning as early as September 2014.

The complaint further alleged that at an investor conference in December 2014, in response to an analyst question about the Company’s rates and profitability, one of the other individual defendants stated that he felt “good about auto insurance in general terms of profitability,” but that “doesn’t mean frequency won’t tick up.” Plaintiffs alleged that this statement was misleading because the Company had already experienced a “tick up” in auto claims frequency, which defendants knew at the time of the statement.

Further, according to the complaint, the Company allegedly first disclosed the increase in the frequency of automobile policy claims in a February 4, 2015 press release. During an earnings call with analysts the next day, in response to a question about the increase, the individual defendants purportedly denied any connection between the increase and the Company’s growth strategy, and claimed that the increase was caused by external factors such as an increase in mileage and precipitation, and “we saw nothing to indicate it’s a quality of business issue.” In May 2015, the Company allegedly disclosed a second consecutive quarter of increased frequency in automobile policy claims, and again allegedly attributed the increase to external factors. On August 4, 2015, after three quarters of increased frequency, one of the individual defendants purportedly admitted that the Company’s growth had contributed to the frequency, and that the Company would “tighten its underwriting standards as a result.” Plaintiffs alleged that this was an admission that the increases were not due solely to external issues.

At the outset, the Court noted that plaintiffs alleged two separate theories of securities fraud—for alleged statements made before February 4, 2015 (prior to disclosing the frequency increase), and for alleged statements made on or after February 4, 2015. With respect to the first category, defendants argued that they were entitled to summary judgment because (i) their statements were factually accurate because the Company correctly reported its Q3 results, (ii) the Company had no duty to disclose the frequency increase for the quarter then in-progress, and (iii) the individual defendants did not act with the requisite scienter because they testified that they believed the at-issue statements were true when made.

The Court found that defendants’ first argument misconstrued plaintiffs’ claims because plaintiffs were not alleging that defendants incorrectly reported the Company’s third quarter results, but rather, plaintiffs were alleging that the Company failed to disclose that it had already experienced an increase in the frequency of claims. With respect to defendants’ second argument, the Court noted that while the securities laws provide for “periodic rather than continuous” disclosure, the Company had a duty to tell the whole truth once it chose to speak on the issue. In other words, once the Company chose to state in December 2014 that its previous results do not mean “frequency won’t tick up[,]” it had a duty to tell the whole, material truth that frequency had already gone up by that time. The Court did, however, grant summary judgment for defendants with respect to the October 2014 statements because the Court held that those statements merely reported historically accurate financial results. Finally, the Court rejected defendants’ argument that defendants did not act with scienter because to find otherwise it would require the Court to ignore plaintiffs’ allegations regarding the timing of certain stock sales. The Court noted that a reasonable jury could find scienter based on plaintiffs’ allegations.

Assessing the alleged statements made after February 4, 2015, the Court first rejected defendants’ argument that the statements were mere opinion under Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015), because the alleged statements “expressed a level of confidence and certainty that cannot be fairly characterized as mere opinion.” Next, the Court held that it could not conclude as a matter of law that defendants lacked scienter, because doing so would require it to ignore circumstantial evidence and make credibility determinations based on deposition testimony. Finally, the Court rejected defendants’ argument that the August 2015 statement was not an admission that the increase in frequency was not solely caused by external factors, and was at least partially due to the Company’s growth strategy, because analyst reports and the market reaction to the statement suggested that it was an admission. Indeed, as the Court highlighted, the Company’s stock price dropped 10% the day after the statements. Accordingly, the Court held that “a reasonable jury could very well find that the August 2015 statements constitute a corrective disclosure.”

Having found that a reasonable jury could find an underlying securities law violation, the Court denied defendants’ summary judgment motion as to the Section 20(a) control person liability claims.