No Coverage for Investor Losses Caused by Blue Bell’s Listeria Outbreak

A 2015 Listeria outbreak linked to ice cream sold by Blue Bell Creameries hospitalized 10 people and killed three.

While those injuries and deaths were certainly “bodily injuries,” a lawsuit filed by investors against Blue Bell’s board of directors for failing to implement proper safeguards is not covered by the company’s commercial general liability policy, according to a decision Tuesday by a panel of the 3rd Circuit Court of Appeals.

The panel affirmed a decision by a US District Court judge in Austin, Texas that found Discover Property & Casualty Insurance Co. and Travelers Indemnity Co. of Connecticut were not liable for Blue Bell’s claims despite policy language that provided coverage for damages caused by “bodily injury.”

“The shareholder complaint seeks damages to compensate for Blue Bell’s economic loss caused by its directors’ and officers’ breach of fiduciary duties,” the panel’s opinion says. “It does not seek to recover any damages on behalf of customers who may have suffered ‘bodily injury’ from the Listeria outbreak.”

Blue Bell was forced to shut down its factories and recall its product after the Listeria outbreak killed three Kansas residents and led to the hospitalization of seven more people in Texas, Alabama and Oklahoma. The company paid $19.35 million in civil and criminal penalties to the federal government for failing to prevent contamination and attempting to cover up the outbreak after the first cases of sickness were reported.

Separately, the board of directors agreed to pay $15 million to settle a shareholder lawsuit alleging they had turned a blind eye to reports of unsanitary practices and conditions at the company’s ice cream plants.

Blue Bell filed a claim with its liability insurers three years after the investors’ lawsuit was filed. Instead of paying, Discover and Travelers filed a federal lawsuit seeking a declaration that the lawsuit was not covered by the commercial liability policies.

US District Judge Robert L. Pitman, with the Western District of Texas in Austin, granted a motion for summary judgment in favor of the insurers. He held that the directors and officers are not “insureds’ under the policy when sued for a “breach of duty to the corporation,” the shareholder lawsuit does not stem from an “accident” or “occurrence” as required by the policy, and the shareholder suit does not allege damages “because of bodily injury.”

The appellate panel ruled that Judge Pitman was wrong about the directors not being “insureds,” but correctly ruled that there was no occurrence and that the damages were a direct result of bodily injury.

The opinion says an intentional act is not an accident. The shareholder lawsuit alleges that the directors “knowingly disregarded contamination risk and safety compliance” and “willfully failed to exercise” their authority. What’s more, the evidence showed the board received several reports from government agencies that their products had tested positive for Listeria, the opinion says. Under Texas law, no coverage is owed for injuries that “could be reasonably anticipated.”

The panel also agreed with the District Court judge that the lawsuit did not seek to recover “damages because of bodily injury.” The panel said the shareholders’ lawsuit seeks to recover for an economic loss caused by the directors’ breach of fiduciary duties.

“It does not seek to recover any damages on behalf of customers who may have suffered “bodily injury” from the Lysteria outbreak,” the opinion says. “Accordingly, we hold that the damages in the shareholder lawsuit are not covered under the plain terms of Blue Bell’s insurance policy.”

The panel affirmed the District Court’s decision to grant summary judgment in favor of the insurers.