How Insurance Works with Labeling and Duty-to-Warn Lawsuits

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.

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