(Article from Insurance Law Alert, July/August 2023)
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Holding
The Fifth Circuit affirmed a Texas district court decision granting insurers’ summary judgment motion, ruling that general liability policies did not cover a shareholder suit arising out of a recall of the policyholder’s product. Discover Prop. & Cas. Ins. Co. v. Blue Bell Creameries USA, 2023 U.S. App. LEXIS 17518 (5th Cir. July 11, 2023).
Background
Blue Bell shut down its factories and issued a nationwide recall of its products following a listeria outbreak. Thereafter, shareholders filed a lawsuit against the company’s directors and officers, alleging breach of fiduciary duties arising from those events and the resulting financial losses. In particular, the complaint alleged that executives knew about the likely presence of listeria contamination at manufacturing plants, yet continued to manufacture and distribute products in disregard of known risks. Blue Bell’s general liability insurers sought a declaration that they had no duty to defend or indemnify the underlying suit. A Texas district court granted the insurers’ summary judgment motion and the Fifth Circuit affirmed.
Decision
The Fifth Circuit rejected the district court’s conclusion that the directors and officers were not additional insureds under the policies. The relevant provision stated that directors and officers were insureds “only with respect to their duties as officers or directors.” The district court had reasoned that because the underlying suit alleged violation of fiduciary duties, it necessarily followed that the executives were not acting within the scope of their duties (and therefore not additional insureds under the policies). The Fifth Circuit disagreed, reasoning that even if executives had breached their fiduciary duties, they were still acting within their roles as directors or officers. In particular, the Fifth Circuit explained that the complaint did not allege that the executives took action that was “outside the scope of ‘managing and operating the ice cream company.’”
Nonetheless, the Fifth Circuit held that coverage was unavailable for two independent reasons. First, the court held that the underlying suit did not allege an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court explained that all underlying claims alleged a knowing disregard of a contamination risk and a willful failure to exercise care, both of which constitute intentional or knowing conduct. Additionally, the court emphasized that the complaint alleged harm that was foreseeable or reasonably anticipated, given the “increasingly frequent and continuing positive presumptive test results for Listeria.”
Second, the Fifth Circuit ruled that the shareholder suit did not seek “damages because of bodily injury” and instead sought to recover only “financial harm.” Blue Bell argued that the complaint alleged damages “because of bodily injury” because the damages contemplated by the shareholder suit were “factually attributable to bodily injuries suffered by Blue Bell customers.” The Fifth Circuit rejected this assertion. Addressing this matter of first impression under Texas law, the Fifth Circuit concluded that the shareholder suit sought damages to compensate for Blue Bell’s economic loss arising from the executives’ alleged breach of fiduciary duties – not for damages on behalf of customers who may have suffered physical harm due to the listeria outbreak.
Comments
The Fifth Circuit’s ruling suggests directors and officers cannot rely on general liability insurance to provide coverage in suits alleging intentional or knowing breaches of fiduciary duties. Moreover, the decision supports the principle that “damages because of bodily injury” requires more than a mere “tenuous connection” between alleged bodily injury actually sustained by an individual and the damages sought in the underlying complaint.
The court expressly distinguished Cincinnati Ins. Co. v. H.D. Smith L.L.C., 829 F.3d 771 (7th Cir. 2016), in which the Seventh Circuit ruled that a general liability insurer had a duty to defend opioid-related claims brought by state entities against a pharmaceutical distributor. There, the Seventh Circuit concluded that a complaint seeking damages arising from the opioid epidemic alleged damages “because of bodily injury.” However, as Fifth Circuit noted, the policy in Cincinnati included a provision stating that “[d]amages because of bodily injury include damages claimed by any person or organization for care, loss of services or death resulting at any time from the bodily injury.” The Fifth Circuit explained that the costs of combating the opioid epidemic included increased medical “care,” whereas here, there was no “colorable argument” that the shareholder suits sought damages for any kind of medical or related “care.”