Fifth Circuit Ruling Against Blue Bell’s Corporate Directors and Officers May Limit Availability of Insurance Coverage in Shareholder Derivative Actions

In a recent ruling, the United States Court of Appeals for the Fifth Circuit determined that Blue Bell’s corporate officers and directors were not entitled to insurance coverage in a shareholder derivative action brought against them.

In Discover Property & Casualty Insurance Company, et al. v. Blue Bell Creameries, USA, et al., the Fifth Circuit held that the Blue Bell executives could not avail themselves of the protections provided under their company’s commercial liability policies. Two main reasons contributed to this ruling: (1) the shareholder lawsuit did not stem from either an “accident” or “occurrence” because the alleged misconducts were “undertaken with knowledge,” and (2) the shareholder suit did not allege damages “because of bodily injury.”

This decision should come as welcome news to corporate liability insurers across the country. In time, the jurisprudential principles set forth therein could offer protections to insurance companies against the threat of being dragged into litigation where coverage should not be provided.

Breakdown of the Blue Bell Case

The underlying facts surrounding the Blue Bell Creameries, USA decision first arose in 2015 when a listeria outbreak led to the shutdown of numerous Blue Bell factories and a nationwide recall of Blue Bell products. The outbreak ultimately resulted in the deaths of three people, with numerous others being hospitalized as a result of the listeria contamination in the company’s ice cream in Arizona, Oklahoma, Kansas, and Texas. These deaths, and the resulting financial losses Blue Bell sustained as a result thereof, led to a shareholder derivative action being filed against Blue Bell’s officer and directors, in which the company’s shareholders alleged that its executives breached their fiduciary duties by failing “to comply with regulations and establish controls” to prevent the outbreak.

The directors and officers sought defense coverage under Blue Bell’s Commercial General Liability insurance policies. The Insurance Companies, in turn, filed a lawsuit in the U.S. District Court for the Western District of Texas, seeking a declaration that they had no duty to defend or indemnify the directors and officers in connection with the shareholder lawsuit.

The applicable language in the policy at issue provided that, in addition to the company, “’executive officers’ and directors are insureds, but only with respect to their duties as [the company’s] officers or directors.” The policy further provides that the insurer agreed to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage,’ and that the insurer has a ‘duty to defend the insured against any ‘suit’ seeking those damages.” Importantly, however, is that these duties to defend and indemnify apply “only if the ‘bodily injury’ and ‘property damage’ is caused by an ‘occurrence,’” which is further defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In light of this policy language, both the Blue Bell corporate executives and the Insurance Companies filed motions for summary judgment.

District Court Applies Texas Law; Blue Bell Appeals

Applying Texas law, the district court ruled in favor of the Insurance Companies. The district court found that the Blue Bell defendants were not entitled to coverage under the policy because (1) the directors and officers are not “insureds” under the policy when sued for “breach of a duty owed to the corporation”; (2) the shareholder lawsuit does not stem from either an “accident” or “occurrence” because the alleged misconducts were undertaken with knowledge”; and (3) the shareholder suit does not allege damages “because of bodily injury.”

The Blue Bell defendants appealed this decision.

On appeal, the Fifth Circuit disagreed with the district court’s determination that the Blue Bell executives were not “insureds” under the policy. The Court reasoned that though the officers and directors were sued based on a dereliction of their duties to the company, “it is possible that a director or officer breached his fiduciary duty…while still acting with respect to his duties.” However, despite finding that the Blue Bell executives should be considered “insureds” under the policy, the Fifth Circuit nevertheless held that coverage should not be extended here.

As to the second policy question at issue here, the Fifth Circuit looked to Texas law to determine whether the alleged injuries in the underlying shareholder lawsuit were caused by an “occurrence,” which the subject policy defines as “an accident.” As the Court noted, under Texas law, a person’s act is not an accident “when he commits an intentional act that results in injuries that ordinarily follow from or could be reasonably anticipated from the intentional acts.” The Court further pointed out that in this context, “an intentional act and the intent to cause injury are two distinct concepts.” As such, the “intentional acts” requirement revolves around the voluntariness of an action or omission, not the actor’s intended outcome.

Bearing those legal principles in mind, the Fifth Circuit agreed with the Insurance Companies and the district court that the company’s alleged injuries were not caused by an “accident.” In reaching this determination, the Court noted that the Blue Bell executive’s “breach of fiduciary duties stemmed from intentional acts, and the Listeria outbreak and the resulting financial harm were natural and probable consequences that could be reasonably anticipated.”

The Fifth Circuit also ruled in favor of the Insurance Companies regarding the third policy question at issue, i.e., whether the shareholder suit alleged damages “because of bodily injury” as was required for coverage under the subject policy.

Here, the Blue Bell executives argued that the lawsuit against them sought damages for bodily injury because the company’s economic damages could ultimately be traced back to the Blue Bell consumer’s bodily injuries, i.e., illness and death. The Fifth Circuit disagreed, however, holding that the shareholder complaint sought damages to compensate Blue Bell’s economic loss caused by its directors’ and officers’ breach of fiduciary duties. The shareholders did not seek to recover damages on behalf of consumers that suffered bodily injury from the listeria outbreak. As such, the Court concluded that the damages sought in the shareholder derivative action were not covered under the plain terms of Blue Bell’s insurance policy.

Takeaways

Though complex derivative actions such as the one at issue here will undoubtedly continue to arise and create coverage issues, the Fifth Circuit’s Blue Bell decision will now provide additional guidance to insurance companies drawn into the fray of corporate litigation.

As the Blue Bell decision demonstrates, though the factual circumstances of a case can cause confusion as to an insurance policy’s applicability, the plain meaning of that policy’s provisions — and the common legal interpretations applied thereto — will typically prevail over the creative arguments of would-be insureds.