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Vol. 11 - Issue 5

October 15, 2022


Policyholder Head Exploding-Decision On “Insured” Status  


There are some cases where the court finds an absence of coverage and policyholder attorneys are apoplectic.  I imagine them reading the case, the anger building up and then boom -- their heads explode.  The court’s opinion in Discover Property & Casualty Co. v. Blue Bell Creameries, No. 21-487 (W.D. Tex. Aug. 22, 2022) is once such opinion.  Attention policyholder attorneys – I warned you.  The case involves insured status.  This is usually a deadly dull issue, but not here.

At issue in Blue Bell Creameries was coverage for certain officers and directors of the ice cream concern for shareholder suits filed against them.  The company experienced a Listeria outbreak in its factories and it resulted in a nationwide recall of its ice cream.  [As an aside, ice cream seems like a challenging product to recall.]

The shareholder suit set out, six ways from Sunday, why the officers’ and directors’ conduct, that caused the outbreak, was particularly egregious.  This is an important part of the decision, so I’ll set out several of the allegations here in full:

“That suit alleged the Officers and Directors breached their fiduciary duty to Blue Bell when they ‘knowingly disregarded Listeria contamination risk and continued the Company's production and distribution of ice cream,’ and when the Board of Directors ‘willfully failed to exercise its fundamental authority and duty to govern Company management and establish standards and controls for Company compliance.’”

“The Complaint states the Defendant Directors ‘willfully failed to exercise [their] fundamental authority to govern management and institute a system of controls for legal compliance and safe operations of the Company.’ Further, it claims the Directors supported the Officers ‘despite the obvious existential threat to the Company due to management’s failure to operate the Company safely and the blatantly evident lack of adequate oversight and reporting of the known Listeria problems.’” (Id. at 48).

The officers and directors sought coverage for the shareholder suits under the company’s commercial general liability policies. 

[I know.  Where’s the “bodily injury?”  What about no “occurrence?”  The court addressed these issues, but I’ll skip them here.  It’s not what makes the case interesting.]

The insurers argued that the officers and directors were not “insureds.”  Under the policy, “executive officers” and directors are insureds, “but only with respect to their duties as [the corporation’s] officers or directors.”

As the insurers saw it, the only cause of action against the officers and directors was for breach of fiduciary duty, which means that they were not acting “‘with respect to their duties as [Blue Bell's] officers or directors’ when they breached those very duties.”

The court agreed, concluding that the officers and directors were not insureds, as they were not properly carrying out their duties, which was to advance the business of the corporation and not act “in a manner that is antagonistic toward the corporation’s business interests.”

The court rejected the officers’ and directors’ argument that they should be insureds as the shareholder suits did not allege that they were “acting in some other capacity or were pursuing the interests of some other entity.” 

I can see this same argument applying to deny routine employees “insured” status, for on-the-job conduct that is alleged to have been wrongful – i.e., job-related (and not assault or other criminal conduct) -- on the basis that their liability is not – as required by a standard CGL policy – “for acts within the scope of their employment by you [named insured] or while performing duties related to the conduct of your [named insured] business.”




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