Liquor Liability Exclusion Bars Coverage for the Four Loko Bodily Injury Lawsuits

In Phusion Projects, Inc. v. Selective Ins. Co., No. 1-15-0172, 2015 Ill. App. LEXIS 942 (Ill. App. Dec. 18, 2015), the manufacturers of the alcoholic beverage “Four Loko” (collectively “Phusion”) filed a declaratory judgment action seeking a declaration that their commercial liability insurer was required to defend and indemnify Phusion in six underlying bodily injury claims. Selective claimed it was not required to defend Phusion because of the policy’s liquor liability exclusion. The trial court agreed and dismissed Phusion’s complaint. Phusion appealed, and the Appellate Court affirmed the underlying decision.

Four Loko is a fruit-flavored malt beverage which contains 12% alcohol by volume, as well as taurine and guarana. During the relevant time period, Four Loko also contained 135 milligrams of caffeine. The underlying suits alleged that the plaintiffs’ injuries were caused by either their own or another individual’s consumption of Four Loko and subsequent intoxication, mainly due to the inclusion of the stimulants in the Four Loko product.

The CGL policy excluded coverage for “bodily injury…for which any insured may be held liable by reason of (1) causing or contributing to the intoxication of any person.” The exclusion applied only where the insured was “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In its initial motion to dismiss the declaratory judgment action, Selective relied on the policy’s liquor liability exclusion. Selective cited to a Federal District Court opinion excluding coverage for Phusion based on an identical liquor liability exclusion. Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 WL 123921 (N.D. Ill. Jan 17, 2012). Phusion argued the underlying lawsuits were not based on liquor liability, but were based on “stimulant liability,” pointing to the allegations that Phusion was liable for adulterating its Four Loko products with caffeine, guarana, and taurine. Phusion pointed to the underlying plaintiffs’ claims that the addition of these stimulants desensitized consumers of Four Loko to the symptoms of intoxication, and caused them to act recklessly. In its reply, Selective relied on the Seventh Circuit’s holding in Netherlands, which recognized that “the presence of energy stimulants in a [sic] alcoholic drink has no legal effect on the applicability of a liquor liability exclusion.” The trial court held the terms of the insurance policy and liquor liability exclusion made it “clear that coverage is excluded when there are claim[s] that an individual sustained bodily injury caused by intoxication,” and therefore Selective had no duty to defend or indemnify Phusion for the lawsuits.

On appeal, Phusion argued that the exclusion did not apply to manufacturers, but rather only to “those in the liquor business to preserve host liquor liability coverage.” Phusion relied on cases establishing that the voluntary consumption of alcohol is the proximate cause of an injury rather than the manufacture of the beverages. The Appellate Court rejected this argument as relevant only to Phusion’s liability in the underlying suits, and not Selective’s duty to defend or indemnify Phusion in those suits. The court instead followed the Seventh Circuit’s interpretation of the exclusion in Netherlands, finding the plain and ordinary meaning of the exclusion applied to “claims of bodily injury…where Phusion may be held liable because it either caused or contributed to the intoxication of any person,” an exclusion which applied specifically to those in the business of manufacturing alcoholic beverages.

Phusion also argued that intoxication was not the “sole and proximate cause” of the injuries asserted in the underlying lawsuits, but that some allegations such as the addition of stimulants to the product fell outside the liquor liability exclusion and were therefore potentially covered by the policy. The court disagreed, finding that Illinois law actually requires an allegation of a proximate cause “wholly independent” from the excluded coverage. The court found that “in order for the underlying lawsuits at issue here to fall within the insurance policy and, thus, outside the liquor liability exclusion, each of the complaints must allege facts that are independent from the event that led to the injury,” requiring that the underlying complaints allege facts “that are independent of ‘causing or contributing to the intoxication of any person.’” Here, it was impossible for anyone to suffer injuries due to the inclusion of stimulants in the product absent consumption of and subsequent intoxication due to Four Loko. It was “[t]he supply of alcohol, regardless of what it is mixed with,” that was “the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.” Quoting the Seventh Circuit, the Court found Phusion’s decision to mix energy stimulants and alcohol “might not have been a very good one,” but did “not amount to tortious conduct that is divorced from the serving of alcohol.” Therefore, the allegations of the underlying complaint fell within the liquor liability exclusion, and Selective had no duty to defend Phusion in the underlying actions.

Courts often struggle with whether to apply policy exclusions in the face of alternative theories of liability in the underlying case, especially when one of those theories arguably falls outside the scope of the exclusion. Here, however, the court appropriately relied on the broad scope of the exclusion and rejected the insured’s efforts to circumvent the exclusion by parsing the allegations of the underlying complaint.

Food Fight: Chicken Producer Awarded Coverage Under Accidental Contamination and Government Recall Coverage Parts

In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd’s, London, Civil Action No. 1:14-953, 2015 U.S. Dist. LEXIS 138609 (E.D. Cal. Oct. 9, 2015), the Eastern District of California, applying New York law, granted plaintiff-chicken producer Foster Poultry Farms’ (“Foster”) motion for partial summary judgment on its declaratory relief action, and denied the defendant-insurers (“Lloyd’s”) motion for summary judgment on both of Foster’s claims.

11-19During the relevant policy period, the United States Department of Agriculture Food Safety and Inspection Service (“FSIS”) issued a Notice of Intended Enforcement (“NOIE”) to withhold marks of inspection for products produced at Foster’s facility, making the chicken products ineligible for sale. As a result, Foster destroyed 1.3 million pounds of chicken. Foster then submitted a claim to Lloyd’s seeking coverage under its product contamination policy for over $12 million in expenses associated with the destruction of the chicken. The policy provided coverage for all “loss” arising out of “insured events,” the two of which at issue in this case were “accidental contamination” and “government recall.” Lloyd’s denied coverage under both provisions of the policy, leading Foster to file an action for declaratory relief and breach of the insurance contract.

On cross-motions for summary judgment, the Court first found that coverage existed under the Accidental Contamination provision of the policy, which provided coverage where Foster could demonstrate “(1) an error in the production of its chicken product, (2) the consumption of which ‘would lead to’ bodily injury.” The first step was established by Foster’s failure to comply with federal sanitation regulations, which resulted in a high frequency of salmonella in the finished chicken products and an outbreak of salmonella illness in the community. The court found compliance with the federal regulations was “vital to controlling food safety hazards during [food] production,” and a failure to do so therefore constituted an “error” in the production of the chicken product.

The second element required showing that the “‘erroneously produced’ chicken product ‘would lead to bodily injury, sickness, disease or death.’” Lloyd’s denied coverage on the basis that Foster had to prove actual contamination of the chicken in order to establish that consumption would be harmful. While Lloyd’s cited heavily to cases that validated denials of coverage due to an insured’s inability to prove actual contamination, the Court determined these cases were distinguishable from Foster’s because coverage under Foster’s policy was triggered by an error in production, not actual contamination. The Court noted, however, that even if Foster’s policy did require actual contamination, that requirement would have been met, because it was undisputed that Foster’s chicken product consistently tested positive for salmonella in the six months prior to its destroying the product for which it sought coverage.

Lloyd’s also argued that the presence of salmonella did not by itself render the product harmful because normal cooking practices would destroy the salmonella organism. The Court rejected this argument, as FSIS identified the Foster facility as the likely source of a salmonella illness outbreak in over two hundred people from fifteen states across the country. Finally, Lloyd’s argued that the policy language required Foster to demonstrate a causal link between its “error” and injury that would have resulted from consuming the product. The court rejected this argument, finding Foster only needed to prove that an error occurred and that the product would have caused harm if consumed, as the provision did not use any causation language. The Court therefore granted Foster partial summary judgment on the accidental contamination policy.

The Court also granted Foster’s motion for partial summary judgment on the government recall provision. The Policy provided coverage for “a voluntary or compulsory recall of Insured Products arising directly from a Regulatory Body’s determination that there is a reasonable probability that Insured Products will cause ‘serious adverse health consequences or death.’” Lloyd’s denied coverage because Foster’s destruction of its product did not constitute a “recall” given that the chicken never left Foster’s control and was never introduced into the stream of commerce. Foster argued that the destroyed chicken had been recalled because the policy’s definition of pre-recall expenses included ascertaining whether the product was contaminated and the potential effects of such contamination, and recall expenses included destroying contaminated products without mention of who was in possession of the product. The Court found both interpretations of the term were reasonable, but because the term was subject to more than one interpretation it was deemed ambiguous, and the contract was thus interpreted in favor of Foster as the insured.

As the body of case law interpreting the newer wave of specialty policies in the food and beverage industry continues to grow, it is extremely important for insurers to analyze the specific policy language and recall/contamination scenarios at issue in those cases when evaluating coverage under their own policies. This particular case has some interesting takeaways on issues such as causation and ambiguity that should guide us going forward.

Third Circuit Holds That Punitive Damages Award Against the Insured is Not Recoverable in Subsequent Bad Faith Action

In Wolfe v. Allstate Prop. & Casualty Ins. Co., Civil Action No. 12-4450, 2015 U.S. App. LEXIS 9876, (3d Cir. June 12, 2015), the Third Circuit, interpreting Pennsylvania law, held that punitive damages awarded against an insured in a personal injury suit may not be recovered in a later breach of contract or bad faith suit against the insurer. We covered the Wolfe case back in December when the Pennsylvania Supreme Court ruled that the insured could assign statutory bad faith claims to the underlying plaintiff.

In the underlying suit, Allstate’s insured rear-ended the plaintiff while under the influence of alcohol. The insured’s policy provided liability coverage up to $50,000, and required Allstate to defend suits by third parties arising out of automobile accidents, but provided that Allstate “would ‘not defend an insured person sued for damages which are not covered by this policy.’” Id. at *2. Plaintiff made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate provided Plaintiff with a counteroffer of $1,200, which plaintiff rejected. After the plaintiff filed suit, Allstate warned the insured that if the damages at trial exceeded his $50,000 policy limit, the insured would be personally responsible for the excess portion of the award. During the course of the litigation, Plaintiff learned of the insured’s intoxication and amended his complaint to include a claim for punitive damages. Allstate informed the insured about the potential for punitive damages, and reminded him “that those damages were not covered under his policy,” and that “Allstate would not pay that portion of [any] verdict, and he would be held responsible for it.” Id. at *3. Throughout the course of litigation, neither party moved from its initial offer or demand, and the case advanced to trial. At trial, the jury awarded Plaintiff $15,000 in compensatory damages, and $50,000 in punitive damages. Allstate paid the compensatory damage award, but not the punitive damage award. In return for plaintiff’s agreement not to enforce the punitive damages judgment against him personally, the insured assigned his rights against Allstate to plaintiff.

Prior to trial in the subsequent bad faith action, Allstate filed a motion in limine seeking to bar evidence of the punitive damages award in the underlying trial as damages in the bad faith suit, as Pennsylvania law prohibits an insurer from paying a punitive damages award. The District Court denied the motion, but the Third Circuit reversed, predicting the Pennsylvania Supreme Court would conclude “in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit.” Id. at *10. Thus, the District Court erred in denying Allstate’s motion in limine to preclude such evidence from being presented to the jury. Furthermore, based on this finding, the Third Circuit held “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case.” Id. at *21. Imposing such a duty, the Third Court held, would be tantamount to making the insurer responsible for punitive damages, which are not insurable under Pennsylvania public policy. Based on these holdings, the Third Circuit granted Allstate a new trial on the bad faith claims, where plaintiff was barred from presenting evidence relating to the $50,000 in punitive damages, but was allowed to seek compensatory damages based on any injuries other than the punitive damages award.

Allstate also filed a motion for summary judgment on the breach of contract and bad faith claims prior to trial. Allstate argued that once the punitive damages award was removed from the plaintiff’s damages claim, the case should be dismissed because the underlying compensatory damage award was within policy limits and therefore the insured suffered no harm. The District Court denied the motion in its entirety. The Third Circuit affirmed the District Court’s denial, first noting that an insurer “can still be liable for nominal damages for violating its contractual duty of good faith by failing to settle.” Id. at *25. Secondly, the Third Circuit upheld the District Court’s denial of summary judgment on the statutory bad faith claim, as the statute makes no requirement that the plaintiff be entitled to damages for the insurer’s bad faith to bring such a claim. This holding reflects the policy behind the statute, which is intended to deter insurance companies from engaging in bad faith practices, not compensate injured insureds. Thus, an insured “does not need compensatory damages to succeed on his statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.” Id. at *28.

The Wolfe decision is particularly notable for its holding that (1) an insured cannot recover an underlying punitive damages award in a subsequent bad faith claim, and (2) an insurer is not necessarily obligated to consider the potential for punitive damages exposure in the underlying case when evaluating a claim for settlement. It remains to be seen whether a Pennsylvania state court would agree with the Third Circuit’s determination. In addition, Wolfe may have limited application going forward depending on the facts and circumstances of future cases.