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From: The eUpdate, 1.28.2014
How Insurance Works with Labeling and Duty-to-Warn Lawsuits
Food processors can use existing and new insurance policies in cases involving alleged violations of Prop 65
by Jonathan M. Cohen and Daniel I. Wolf
Labeling and duty-to-warn cases continue to emerge as a key area of risk for food and beverage companies. In light of this trend, food and beverage companies should make certain that they understand the nature of these potential claims, the extent to which their insurance policies may cover these claims, and the steps they may need to take to secure coverage should a claim arise.
Food and beverage companies have faced an array of labeling and duty-to-warn cases in recent years.
One of the fastest growing risks in this area stems from cases alleging violations of California’s Safe Drinking Water and Toxic Enforcement Act of 1986—better known as Proposition 65 or Prop 65. Prop 65 requires that companies provide a warning, often on the label, for any product sold in California that “knowingly and intentionally” exposes consumers to chemicals that are known carcinogens or reproductive toxins. The Prop 65 list contains over 800 chemicals, many of which occur naturally in the environment or are otherwise difficult or impossible to avoid in a product. While Prop 65 has exemptions for “naturally occurring” chemicals and a minimal level safe harbor provision, these exceptions are narrow and often not enough to help companies avoid lawsuits.
Moreover, Prop 65 empowers private parties to bring a lawsuit under certain circumstances, and a handful of law firms and public interest groups have begun to specialize in Prop 65 lawsuits. Thus, while its purpose may be laudable, Prop 65 creates a real risk that even the most responsible companies, and even ones that ultimately will be proven not to have violated the law, may need to spend significant amounts to defend against Prop 65 lawsuits.
In addition to Prop 65 claims, companies are facing a significant uptick in actions alleging their advertising or labeling is misleading or erroneous. These cases often arise in the context of claims asserting that products contain ingredients that plaintiffs contend are not properly characterized as “all natural”—such as high fructose corn syrup or processed food ingredients. Other cases allege products do not deliver promised benefits, and in particular promised health benefits.
For these reasons, food and beverage companies should look closely at their insurance policies to determine whether they have coverage should they face lawsuits or liabilities from Prop 65, labeling, or duty-to-warn cases.
Most companies have standard-form commercial general liability (CGL) insurance policies that may provide coverage for certain of these claims. For instance, CGL policies typically cover third-party claims arising from bodily injury or personal injury. Particularly in the context of cases alleging the absence of a health benefit, companies may be able to establish that the CGL policy covers the claim. CGL policies also may provide coverage for false advertising claims under the coverage for “advertising injury”—though in many instances “advertising injury” is defined to mean only very specific types of intellectual property claims or claims arising from specific types of tortious conduct. Prop 65 claims, too, may in some instances be covered under standard CGL policies. However, because many Prop 65 complaints do not allege bodily injury, CGL insurers often assert that their policies do not apply. Companies should look hard at the allegations in the complaint to determine whether they are broad enough to trigger a CGL policy.
Companies should also look at their directors’ and officers’ (D&O) policies for potential coverage. Frequently, these policies provide the company with coverage for its own wrongful acts. While some D&O policies limit organizational coverage to wrongful acts arising from narrowly defined categories such as securities actions, there is substantial variation in policy forms and some policies define “wrongful acts” such that coverage for labeling and failure to warn claims is available. Companies need to examine their policies closely before a claim arises to determine whether their D&O policies are sufficiently broad to cover labeling and duty-to-warn cases. If a review of their D&O policies suggests that they may not have coverage for labeling and duty-to-warn claims, food and beverage companies should work with their counsel and their brokers to explore whether broader coverage may be available to them.
When facing labeling and duty-to-warn claims—which often seek primarily injunctive relief or civil penalties—the most valuable part of any insurance policy is frequently the policy’s coverage for defense. Both CGL and D&O policies typically require the insurer to defend, or to pay defense costs, if any allegation in the complaint even arguably or potentially could be covered. In determining whether the insurer has a defense duty, all ambiguity in both the policy and the complaint generally must be construed in the policyholder’s favor, and thus in favor of coverage.
Companies should make certain insurers meet these defense obligations in a way that supports, and does not undercut, their policyholder’s interests. An insurer may have a duty to defend, but an insurer might claim that the duty comes with a right to control the defense, which insurers also sometimes assert includes a right to choose defense counsel and control settlement strategy.
Because these types of labeling and failure to warn cases sometimes put food and beverage companies in real risk of brand damage or other harms beyond the legal liability at issue in the claim, the stakes are very high. Companies should remember that, at bottom, it is their defense, and policyholders generally have the right to a defense that furthers not just their success in a particular litigation but also their broader interests. Where the insurer’s interests and the policyholder’s interests are in conflict, the insurer may be obligated to provide the policyholder with independent counsel, at the insurer’s expense.
Finally, it is important for companies to be prepared to avoid or refute insurer defenses. In the first instance, companies should be very careful to familiarize themselves with the policy’s conditions to coverage, such as the duties to provide notice and to cooperate with the insurer. Companies must make every effort to comply with these requirements because, in some states, a failure to comply could mean jeopardizing coverage.
Insurers also often assert a range of defenses based on coverage exclusions common to most modern insurance policies. For example, insurers often claim the policy’s pollution exclusion applies to Prop 65 claims, arguing that the presence of a potentially dangerous substance in the product means that any liability arises as a result of the dispersal or release of a pollutant, as those terms are used in the policies. However, policyholders often have very strong responses to these exclusion-based arguments. For instance, in California, where Prop 65 cases arise, the California Supreme Court addressed the pollution exclusion issue in McKinnon v. Truck Insurance Exchange, 31 Cal. 4th 635 (2003), and forcefully rejected a broad construction of the pollution exclusion, holding instead that the normal use of a product, in the ordinary course, does not constitute dispersal or release of a pollutant. Similarly, insurers’ other arguments often can be refuted based on well-established insurance cases, even if those cases were not in the context of food labeling or duty-to-warn cases.
Food and beverage companies are facing an increasing avalanche of labeling and duty-to-warn cases. Before the company faces a claim, it and its counsel need to review its insurance coverage to ensure the company has protection broad enough to cover these types of claims. Then, if a risk turns into a claim, the company should take immediate steps to secure its insurance proceeds.
Cohen is a partner in the Washington, D.C. law firm of Gilbert LLP. He works extensively with food companies on their legal risk management strategies. Reach him at email@example.com.
Wolf is an associate at Gilbert LLP. He litigates in both state and federal court on behalf of a broad range of clients. Reach him at firstname.lastname@example.org.