Navigating California’s Safe Drinking Water and Toxic Enforcement Act of 1986—better known as Proposition 65—is becoming an increasingly difficult endeavor for California-based companies and companies that do business in California. Because Proposition 65 allows for private causes of action and the recovery of attorneys’ fees, recently there have been a steady stream of claims alleging Proposition 65 violations. What companies may not realize, however, is that they may have insurance coverage available to cover their costs in defending against and responding to such claims.
Proposition 65 requires that companies provide a warning on any product sold in California that “knowingly and intentionally” exposes customers to chemicals that California has listed as known carcinogens or reproductive toxins. The list of chemicals for which this Proposition 65 warning applies now includes over 850 substances, many of which are naturally occurring in the environment or are otherwise difficult to exclude in the making of a product. Proposition 65 is enforced through litigation, including through lawsuits brought by private parties, and a number of law firms and public interest firms have begun to emphasize Proposition 65 lawsuits as a key component of their practice. In addition to injunctive relief, Proposition 65 permits cost-shifting by plaintiffs. As a result, defending against Proposition 65 lawsuits, particularly for companies in industries such as the food and flavorings industry, has become increasingly common and expensive.
Many companies may not be aware that they have insurance coverage for Proposition 65 claims. Therefore, when faced with a Proposition 65 claim, companies should review their insurance policies carefully and work with their counsel to explore the extent of available coverage. This coverage can arise from a variety of sources, including, depending on the allegations of the claim at issue and the specific language of a company’s insurance policies, commercial general liability policies and directors’ and officers’ policies. In addition, companies often have supplemental product contamination/recall policies that may apply to at least some costs of complying with injunctions resulting from Proposition 65 claims.
The provisions of these policies may include coverage for liability and defense costs incurred in responding to and litigating Proposition 65 lawsuits. In particular, the policies’ defense coverage can prove very valuable in responding to Proposition 65 claims. Insurance policies often require insurers to pay defense costs but also to defend the claims at hand. In determining the applicability of a duty to defend, any ambiguous provision of a policy must be construed in a way that is favorable to the policyholder, and thus in favor of coverage.
To the extent that the insurance policies obligate the insurer to defend against claims, companies should make certain that insurers meet these defense obligations in a way that maximizes the benefit to the insured. In this regard, companies should keep in mind that as policyholders, they typically have the right to a defense that furthers not only their success in the pending litigation but also their corporate reputation and operations generally. If a conflict arises and the interests of the company do not mirror the interests of the insurer, for instance, if the insurer initially denies coverage or takes positions contrary to the policyholder’s interests (potentially even through a reservation of rights), the company may be able to require the insurer to hire independent counsel to defend the claim, at the insurer’s expense.
Regardless of which insurance policy applies, because coverage for Proposition 65 claims is a relatively new issue, companies should be prepared to face push back from insurers and to address and overcome insurers’ coverage defenses. For instance, insurers often argue that the insuring agreements of the policies at issue do not provide an affirmative grant of coverage for Proposition 65 claims. However, although there is substantial variation in policy forms and the scope and extent of covered claims, many companies have strong arguments that one or more of their policies cover defense costs and certain indemnity expenses associated with Proposition 65 claims.
Additionally, insurers often argue that various policy exclusions apply to prevent coverage for Proposition 65 claims, such as the pollution exclusion and the intentional misconduct exclusion. Regarding the latter exclusion, depending on the language of the policy at issue, insurers may argue that a company committed fraud in the labeling of its product or expected/intended the contaminant’s presence in the product.
There are strong responses to these arguments. With respect to the pollution exclusion, many state courts, including the California Supreme Court, have narrowly construed the scope of this exclusion, such that the presence of a dangerous substance in a product does not automatically qualify it as a pollutant. See, e.g., McKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 652-53 (2003) (holding that the normal application of a product containing a harmful substance does not constitute the dispersal or release of a contaminant). Similarly, with respect to the intentional misconduct exclusion, the insurer may be unable to demonstrate the requisite intent on the part of the company. Moreover, this exclusion may be inapplicable in any event, because this defense typically requires a final adjudication showing the company’s wrongdoing, and the insurer and the company may settle or otherwise resolve the claim prior to a final adjudication.
At bottom, given the risk of becoming embroiled in a Proposition 65 lawsuit, companies should be aware that they often will be able to look to their insurance carriers in the event a Proposition 65 claim arises. To maximize their available coverage, companies should engage in a careful analysis of their insurance policies and be prepared to address and overcome their insurers’ defenses.