In Discover Property & Cas. Ins. Co.; The Traveler Indemnity Co. of Connecticut v. Blue Bell Creameries USA, Inc. et al, 22-50842, the U.S. Fifth Circuit Court of Appeals considered an appeal of a summary judgment excluding coverage for the alleged breach of fiduciary duty and economic losses by the Blue Bell defendants associated with listeria contamination of ice cream.
In 2015, a listeria outbreak led to the shutdown of the Blue Bell factories and a recall of its products. As a result, Blue Bell suffered financial loss which led to a shareholder’s derivative suit against Blue Bell’s directors and officers alleging a breach of fiduciary duties. It was alleged that the officers and directors knew that Blue Bell’s manufacturing plants had repeatedly and consistently tested positive for listeria, but that manufacturing, and distribution of the products continued thereby causing losses of hundreds of millions of dollars to Blue Bell and its shareholders.
A derivative action is brought by one of the shareholders in the name of the company or corporation to redress an injury to the company/corporation or to enforce a duty owed to the company/corporation. No person claimed an individual loss, but rather sought to recover for the company the damages sustained as a result of the breach of duty.
The directors and officers of Blue Bell sought coverage under Commercial General Liability (CGL) coverage. Discover Property and Casualty Insurance and Travelers Indemnity denied coverage. The district court agreed that no coverage was extended for the derivative suit.
The Fifth Circuit considered whether the officers and directors qualified as an “insured” under the policies in question and found that each was an “insured.” The allegations of liability fell within the duties of the officers and directors, as required by the policy.
However, the Court went on to find that no coverage existed under Discover’s or Traveler’s policies for the alleged liability of the officers and directors. The policy coverage (the duty to defend and to indemnify) was only triggered if liability was caused by an “occurrence” which was defined in the policies to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Under Texas law, the Court considered that an act is not an “accident” when a person commits an intentional act that results in injuries that ordinarily follow from or could be reasonably anticipated from the intentional act. The Fifth Circuit found that there was no “occurrence” or accident alleged because the suit alleged that the officers and directors knowingly disregarded the risk of contamination and safety compliance and failed to exercise their authority. As such, the listeria breakout was caused by intentional acts rather than an accident.
Additionally, the Fifth Circuit considered whether damages covered under the policy (“bodily injury” and “property damage”) had been alleged, and found such damages were not alleged. There was no argument by the parties that “property damage” had been alleged. However, Blue Bell alleged it met the criteria of “bodily injury” being alleged. The Fifth Circuit disagreed.
Blue Bell attempted to argue that because the damages sought in the lawsuit were attributable to bodily injury suffered by Blue Bell customers, the damages were “because of” bodily injury and should be covered by the insurance policies. The insurers pointed out that bodily injury damages were not sought, but that the suit only set out to recover for financial harm from the alleged breach of fiduciary duty. Relying on the body of caselaw supporting a finding of no coverage on the basis that there was no bodily injury and where there were “economic” damages only, summary judgment was granted in favor of the insurers.
Among other cases, the Fifth Circuit Court of Appeals relied upon a prior opinion in Preau v. St. Paul Fire & Marine Insurance Co., 645 F.3d 293 (5th Cir. 2011). In Preu, there was no suit for bodily injury to a patient, but rather, a suit to recover money paid to settle a tort suit, based upon claims of negligent misrepresentation. In that case, a Medical Center sought damages against Dr. Preu for alleged misrepresentations in a letter of recommendation for Dr. Berry. Preu’s letter failed to state that Dr. Berry had a history of drug abuse. The Medical Center allowed Dr. Berry to practice; Berry failed to properly administer anesthesia to a patient who thereafter remained in a vegetative state as a result of the doctor’s mistake. Dr. Preu was held liable for a portion of the damages that the Medical Center paid to settle the tort suit relating to Dr. Berry’s error and attorney fees. Preu sought to have his insurance company pay for what he was cast in judgment. The Fifth Circuit held in Preu that the economic damages sought to be recovered were different and distinguishable from the bodily injury suffered by Dr. Berry’s patient. Because there were economic damage only, Dr. Preu’s policy did not extend coverage for his alleged liability caused by his negligent misrepresentation.
In the case of Blue Bell, a similar economic only loss was sustained, and no portion of the shareholder derivative suit sought recovery for “bodily injury”. Thus, Blue Bell’s officers and directors were not entitled to either a defense of the lawsuit nor indemnity for their liability to reimburse the company for economic loss associated with their alleged breach of fiduciary duty.