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The steady rise in false advertising claims against consumer-facing companies has exposed a major insurance protection gap.

The drivers of these legal actions are many and varied and include consumers’ growing – and regularly-shifting – health preoccupations; sustainability concerns; patriotic consumerism; and even plain old disappointment with fast-food fare.

“Natural,” “green,” “organic,” “pure,” “healthy”, “premium” and “Made in the USA” are among the potential flashpoints, but the list is long, and, apparently, growing.

Plaintiffs have several attack paths, and an abundance of law firms to take up these cases. The means it’s easier than ever to drum up support for class actions, while the almost-infinite advertising possibilities afforded by the Internet, and the rise of influencers, have increased exposures.

However, liability insurance policies are unlikely to respond to these claims and many policyholders and brokers may not be aware of that fact. Cyber policies with media liability attached won’t include false advertising claims. Standard media policies also generally exclude these losses.

Lawyers at Knobbe Martens, writing in , recently reported that the number of annual false advertising class action lawsuits in the early years of this decade had quadrupled from a decade earlier, while of a rise in claims linked to so-called forever chemicals.

Regulators are also active. Recent targets of successful Federal Trade Commission (FTC) enforcement action include Kohl’s Inc. and Walmart Inc. for falsely marketing rayon textile products as bamboo. The the 2022 settlement would cost the two companies a combined $5.5 million in civil penalties. The FTC has also just rolled out new rules to crack down on fake reviews and undisclosed influencer partners.

In the U.S., consumers – and competitors – are empowered by extensive state and Federal legislation. , for example, is the preeminent vehicle for competitor claims. It permits so-called “puffery” – vague, obviously subjective claims designed to make products more appealing – but outlaws false and misleading statements about a company’s products, or those of a rival. Importantly, it defines what constitutes advertising broadly and does not require a plaintiff to show they suffered actual injury from the alleged false advertising, only that the possibility was there.

Recent false advertising cases include mattress makers – a surprisingly popular target. Williams-Sonoma was last year hit with a for violating the FTC’s Made in the USA rules. Other suits that have targeted food and beverages makers, include manufacturers of honey and “green” juices; pharmaceutical companies; and household products groups.

Subway last year attracted a suit for allegedly scrimping on meat, having seen off litigation in 2023 concerning the quality of its tuna. In other sectors, purchasers of digital goods recently gained new protection in the state of California – the spiritual home of class-action litigation – with an .

Outcomes of litigation can be surprising. Most notorious, perhaps, is the “Red Bull gives you wings” lawsuit of a decade ago, brought by plaintiffs who argued that the performance-enhancing implication of the slogan above other caffeinated sources of sustenance was misleading. The Austrian beverages maker agreed to settle for $13 million, and attorneys’ fees reportedly added several millions more to the overall cost.

Unaware of Exposures

Potential targets are often naively unaware of their exposures. Neither do they understand the potential cost of fines, compensation and lawyers’ fees; the financial toll such suits can take, including lost revenue and stock-value declines; or the prospect of brand and reputational damage. A long list of the associated practical risks cited by also includes internal morale issues and difficulties with partnerships.

Companies tend to wrongly assume that they are insured, if they even think about their exposures in the first place. A lack of media liability expertise – internally, and sometimes also from external counsel – is partly to blame. Brokers have also generally failed to explain the risks, often because they don’t understand them themselves.

Buying False Advertising Extension

However, with the growing protection gap, insureds should be considering whether to buy a false advertising extension to their media liability cover. Although the action may happen online, cyber policies won’t cover this risk, so these insureds would always also need a separate media policy with the false advertising extension.

False advertising insurance provides broad coverage, whatever the precise legislative attack path, as long as insureds meet the conditions outlined in the endorsement. Regulatory enforcement actions involving false advertising and deceptive trade practices are also likely to be covered, provided the endorsement conditions are met. Civil penalties and fines may not be, however.

The London market and Lloyd’s is at the forefront of providing this cover thanks to its concentration of media liability expertise.

Brokers can advise companies on the precise terms of false advertising cover and the conditions attached, as well as their risk exposures and how to manage these prudently.

This involves considering how insureds use social media. Here, any influencers deployed need to stick to the script. It also includes determining who can authorize advertising campaigns and other marketing initiatives, and who has oversight over branding. Those individuals should be assiduous about taking legal advice on whether any advertising, marketing or branding initiative could be deemed to be misleading and misrepresentative of the product.

External legal counsel is vital – but it’s essential that the law firm has genuine media liability expertise. In the legal profession as in the insurance market, this know-how can sometimes be hard to come by.

False advertising lawsuits – and class actions in general – are most associated with the U.S. However, it’s important to note also that EU law provides protection against false claims about cures and about environmental credentials. Other protections vary from member state to member state. In the UK, consumers are protected from misleading advertising by 2008 legislation. Collective redress procedures are gaining traction in both markets, while the litigation funding market is largely unregulated and on a rapid growth trajectory.

So, this is not just a U.S. issue and on both sides of the Atlantic, potential defendants are unlikely to have adequate insurance cover.

Of course, consumer protections are sorely needed in a world where truth and fiction are increasingly blurred. But for consumer-facing companies of all types, claims alleging false advertising are a growing risk and one that needs to be managed thoughtfully.

Topics Trends Claims