01 Nov Insurance Coverage for Prop 65 Lawsuits?

In 1986, California’s electorate passed a voter initiative called Proposition 65, or “Prop 65,” which was later enacted into law as the “Safe Drinking Water and Toxic Enforcement Act of 1986.” The goal of the initiative was to improve the overall health of California’s residents and to combat toxicity in consumer products. The “consumer product” part of the law provides an enforcement mechanism allowing the government and certain private parties to sue businesses alleged to have violated Prop 65 by, for example, selling a product containing a dangerous toxin that can harm a consumer’s health — that is, unless the seller has provided sufficient warning notices to the public.If your company gets sued for a Prop 65 violation, you might think that your company’s insurance policy — usually, a Commercial General Liability (“CGL”) policy — would afford coverage under the “bodily injury” clause of the policy. After all, isn’t the fundamental purpose of Prop 65 to protect people from bodily injuries?

If that is what you thought, you would be wrong.

In a recent published opinion, the California Court of Appeal found that, under the terms of a standard CGL policy, an insurance company had no duty to defend or indemnify its insured for a lawsuit alleging that the insured company had violated Prop 65.

The case is Ulta Salon v. Travelers Property Casualty (2011) 197 Cal.App.4th 424. The plaintiff, Ulta Salon, had a ten million dollar CGL policy from Travelers, providing standard coverage for the defense of any lawsuit seeking recovery for bodily injury or property damage. Ulta Salon asked Travelers to defend a lawsuit alleging that the company’s nail care products contained toxic ingredients, and that there were insufficient Prop 65 warnings. Travelers denied coverage, and Ulta Salon sued Travelers in an insurance coverage lawsuit.

By way of background, the California Supreme Court has held that under a CGL policy, an insurer must defend its insured whenever a lawsuit could potentially give rise to a claim covered by insurance. Therefore, Ulta Salon could prevail in its insurance coverage lawsuit against Travelers by showing that there was a “potential” that the insurance policy covered the damages alleged in the Prop 65 lawsuit.

Travelers had denied coverage on grounds that the Prop 65 complaint did not allege bodily injury or property damage. In opposition, Ulta Salon argued that the underlying complaint alleged facts which gave rise to a potential for coverage, because the complaint alleged exposure to a chemical that was known to cause cancer. But both the trial court and the Court of Appeal agreed with Travelers, and denied coverage.

According to the Court of Appeal, the Prop 65 lawsuit was solely based on violations of Prop 65’s “clear and reasonable warnings” requirements for consumer products. Under Prop 65 businesses are required to notify consumers about significant amounts of certain chemicals in consumer products. By providing this information, Prop 65 enables Californians to make informed decisions about protecting themselves from exposure to these chemicals.

Ulta Salon argued that the underlying lawsuit contemplated bodily harm, because the complaint repeatedly emphasized the toxic nature of the products that it manufactured and sold, so that the complaint potentially gave rise to bodily injury claims. But the appellate court rejected the argument, finding that it “misconstrued” the principle of potential liability under an insurance policy. The appellate court explained that although an insurer’s duty to defend “is broader than the duty to indemnify, the duty to defend depends upon facts known to the insurer at the inception of the suit. . . . The insured may not speculate about unpled third party claims to manufacture coverage.” Thus, Travelers did not owe Ulta Salon a duty to defend because the complaint did not make any claim of bodily injury; rather, the claim was for enforcement of a statute and an award of penalties — something the law considers to be different from “damages.”

All businesses selling consumer products in California should be aware of potential liability for violating Prop 65, because the law establishes a legal regime under which “bounty hunter” lawyers can sue alleged violators on behalf of the public (and collect a portion of any penalties awarded against the defendant(s)). However, unless the complaint makes a claim for some type of personal injury, a company’s CGL policy will not require the insurance company to defend the lawsuit.

Postscript

We have long advocated tendering any lawsuit or other claim against your company to the company’s CGL insurer, even where there are serious doubts about coverage. The curious case of Barnett v. State Farm General Ins. Co. (2011) 200 Cal.App.4th 536 illustrates one of the limits of coverage under a policy insuring a homeowner against theft.

The plaintiff in Barnett owned twelve marijuana plants (each seven feet tall) and several bags of frozen and loose marijuana, all of which were seized in a police raid under a search and seizure warrant. When the district attorney declined to prosecute and the police destroyed the evidence, the plaintiff sued his insurer for the value of the marijuana ($98,000), on grounds that the seizure qualified as a “theft” under his homeowner’s policy. But the insurance company won the case, with the court holding there was no evidence that the police had acted with criminal intent in seizing the goods (among other reasons).

The moral of the story? Yes, you should always tender claims to your insurance company — and you should also recognize that not every claim will be accepted; there are numerous legal and contractual limitations on the scope of coverage.

But you will never know if you are covered unless you “tender that claim.”