Food and beverage industry target of new supply chain composition and disclosure suits. Are you covered?

As if risks relating to product recalls, product labeling, and food contamination were not enough, the food and beverage industry now faces potential liability in connection with the alleged composition of its global supply chains. In recent months, several putative class actions have been filed in California federal courts against food product companies for failing to disclose alleged slave labor in their supply chains. These suits, which allege unfair competition, false advertising, and consumer protection violations, may well be covered by insurance, including that provided by directors, officers, and entity liability policies (“D&O policies”).

The first such suit was filed against Costco Wholesale Corp. in August 2015, claiming that contrary to disclosures, it was selling farmed prawns fed fish meal by “pirate boats manned with slaves.”  Not long after, Nestlé USA, Inc., and Nestlé Mexico, S.A., were sued because they produce chocolate products using cocoa beans supposedly collected in Africa by both child and slave labor. Iams Company and Nestlé USA Inc. also were sued in similar class actions contending that their pet food contained products allegedly supplied by companies using “sea slaves.”

More lawsuits of this kind are likely to follow. The suits follow the same general pleading pattern. They allege a failure to disclose to consumers the use of forced labor, which purportedly deceived consumers into purchasing products they would not have otherwise. The suits also allege violations of the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq.; the Consumers Legal Remedies Act, Cal. Civ. Code § 1750, et seq.; and the False Advertising Law, Cal. Bus. & Prof. Code § 17500, et seq.

These suits may well be covered by D&O policies, which are intended to protect directors, officers, employees, and sometimes the involved company against allegations of wrongful conduct, such as breach of duties, neglect, error, misstatements, misleading statements, and other omissions or acts. Most D&O policies defend and indemnify against alleged wrongful acts that have taken place prior to or during the policy’s period (although some policies may exclude certain past acts).

An insurer’s coverage obligations under a D&O policy are triggered by a “claim,” which is often defined broadly to include any written demand for monetary or nonmonetary relief. These policies therefore respond to government investigations, subpoenas, and suits by stakeholders, customers, consumer groups, competitors, vendors, suppliers, government enforcement agencies, and regulatory groups.

D&O insurers often attempt to defeat or limit their coverage obligations by citing policy exclusions for violations of antitrust, business competition, and unfair trade practices laws. Case law is mixed on whether such exclusions apply to violations of consumer protection laws or are limited in application to allegations of anticompetitive behavior. Indeed, there is pro-policyholder authority that the exclusions do not apply to consumer protection violations. In Big Bridge Holdings, Inc. v. Twin City Fire Insurance Co., No. 14–cv–8052, 2015 WL 5444703 (N.D. Ill. Sept. 15, 2015), for example, the policyholder faced multiple lawsuits alleging it enrolled consumers in fee-based monthly membership programs without their consent. The court found the causes of action were “fraud-based consumer-protection claims alleging deceptive (not anti-competitive) business practices.”  The district court therefore held that the involved policy’s exclusions applied to antitrust violations and other anticompetitive conduct, but not to alleged consumer protection and consumer fraud violations.

Corporate policyholders in the food and beverage industry should review the terms and conditions of their liability policies to understand the coverage currently available to them if they are faced with a supply chain suit. They also should consider what improvements can be made to their policies to enhance their coverage for risks posed by global supply chain claims. If sued, policyholders should determine when and how their policy requires they give notice of the claim to involved insurers. D&O policies are often “claims made” policies, meaning that to be covered, a claim must be first asserted or “made” against the policyholder during the policy period. But some D&O policies also require that a claim be reported to the insurer during the same policy period, or during a reporting “tail” (i.e., a brief period of time after a policy expires, during which claims made during the policy period can be reported). Many insurers assert that failure to adhere to a policy’s notice requirements voids coverage, and some courts agree.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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