By David Laufer*, CEO, LAUFER SPECIALTY I-RISK LLC
There is no insurance policy in the market today that provides a defense and indemnity for a Consumer Class Action Lawsuit (CAL) seeking purely economic damages on account of a product’s label error. To protect businesses in the Consumer-Packaged-Goods market from these uninsured label error risks, Laufer Specialty I-Risk LLC (LSIR) developed a Label & Packaging Policy (LPP) to protect businesses from this uninsured risk.
All Consumer-Packaged-Goods (CPG) require labels and packaging (LP). The CPG’s market value was $635 billion in the United States in 2019. In 2020, the CPG value will likely be higher due to COVID-19; as of July 26, 2020, the IRIÆ CPG Demand Index increased 10 percent over the previous year. California’s CPG’s market value was $93 billion in 2019. California’s real GDP was $2.79 trillion in 2019 3.
The content of each product’s label and packaging must comply with numerous federal, state and international laws. See, for examples, The Federal Food, Drug, and Cosmetic Act, 21 U.S.C. Sec. 301 et seq., and The United States Fair Packaging and Labeling Act and Regulations at 16 C.F.F. Part 500 4. See, Greenberg v. Target Corp. 402 F. Supp. 3d 836(N.D. Cal. 2019), aff’d Greenberg v. Target Corp. No.19-16699---F.3rd ---(9th Cir. 2021).
California, the fifth largest world economy, has the strongest consumer protection laws governing labels, packages, products and warnings. Proposition 65, for example, requires businesses to warn consumers that their products may expose them to chemicals that cause cancer, birth defects, and reproductive harm. See, California Proposition 65, The Safe Water and Toxic Enforcement Act of 1986 5, Code of Regulations Title 27, Article 7 (listing 1,000 chemicals known to cause cancer, birth defects and other reproductive harm). The California Attorney General reported that businesses paid $35M in 2018 to private lawyers and bounty hunters to settle 829 Proposition 65 label error cases 7.
The standard Commercial General Liability (CGL) policy does not provide a defense and indemnity for a CAL that alleges purely economic damages caused by an error on a product’s LP. To invoke the duty to defend and indemnity under the CGL, the lawsuit must allege an occurrence that caused “bodily injury” or “property damage.” See, American International BK. V. Fidelity Deposit Co., 49 Cal.App.4th 1558 (1996).
The CGL does not provide a duty to defend and indemnity for purely economic damage claims arising from label errors. See, Ulta Salon v. Travelers Property Casualty of America, 197 Cal. App. 4th 424 (2011) [Proposition 65 label warning omission claim not covered by CGL]; and Wisconsin Label v. Northbrook Prop. Cas. Ins. Co., 233 Wis. 2nd 314 (2000) [The economic loss doctrine bars coverage under a CGL for purely economic damage caused by a label error].
The California Supreme Court affirmed standing to sue for purely economic damages sustained by consumers in a CAL alleging an error on a product label:
The consumer paid more money than he or she otherwise would have been willing to expend. The consumer paid more than he or she valued the product. That increment, the extra money paid, is the economic injury and affords the consumer standing to sue. See, Kwikset v. Superior Court, 51 Cal. 4th310,329-330 (2011) [Product mislabeled “Made in USA”].
In McGee v.S.L. Snack Nat’l. 982 F.3rd 700(9th Cir. 2020) the court held that Kwikset’s standing to sue ruling was not controlling in federal court because Article III standing is “substantially narrower” than the laws relied on to support standing in state court in Kwikset.
McGee v. S. L. Snacks affirmed the dismissal of the CAL because the complaint did not plausibly allege economic damage under either the “benefit of bargain” or “overpayment’ economic theories. Federal courts are rigorously evaluating Article III standing to sue when ruling on a motion to dismiss and standing to seek injunctive relief when the consumer alleges knowledge of a label error. See, Davidson v. Kimberly-Clark Corp., 889 F.3rd 956 (9th Cir.2017).
In addition to CGL cases discussed above, the following standard policy exclusions in current liability insurance policies will also exclude a duty to defend and indemnity for a CAL based on an error on a label or package:
• Claims arising out of the failure of goods, products, or services to conform with any written statement of quality or performance on the label or package
• Claims arising out of the wrong description of the price of goods or products
• Claims arising out of errors in the design, printed materials, information, or images contained in, or upon, the packaging or labeling
• Claims for breach of warranty or a representation made at any time with respect to the fitness, quality, durability, performance, and use of the product
These standard liability policy exclusions result in a denial of a defense and indemnity for a CAL. CPG business are self-insuring against these lawsuits and have paid billions of dollars to defend and resolve them in 2019 8.
A recent class action survey provides the following data from companies responding to the survey:
• United States firms spent $2.64 billion to defend class action claims, a 30 percent increase from five years prior9
• Sixteen percent of class actions involved consumer fraud 10
• In-house attorneys worked over 2,600 hours per firm on class action cases 11
• In-house attorney fees would have cost about $900,000 per firm at $344 per hour 12
• Just 22 percent of firms reported having at least part of their class action costs protected by existing insurance 13
Again, the CAL solely seeking economic damages is an uninsured risk under current CGL and standard liability insurance policies. The uninsured CAL is a threat to CPG businesses’ balance sheets, and it undermines the sales and growth of the $635 billion CPG market.
LSIR developed the LPP to provide a defense and indemnity for the CAL and to fill the gap in coverage in the CGL and liability policies. LSIR’s proprietary intellectual property includes a policy specimen covering the CAL, an application for underwriting coverage, risk management profiles, and procedures to economically resolve the CAL.
LSIR developed the RMP to identify the errors, omissions and misleading labels and packaging that lead to the increased risk of a CAL. The RMP will utilize data obtained from propriety research, studies and the Insurance Application (IA) to underwrite a business seeking LPP coverage by quantifying the risk, moral hazard and then to determine the premium rate.
LPP marketing materials will demonstrate LPP’s value to manufacturers, wholesalers, distributors, importers/exporters, e-commerce platforms and brick and mortar retailers.
• To protect their business from the uninsured CCA that threatens their balance sheet and requires a cash balance reserve that limits business growth
• To reduces in-house legal expenses and transaction costs
• To meet contractual obligations to defend and indemnify the distribution chain for label and packaging errors
• To transfer/decrease cash balance sheet claim reserves (self-insurance) to an affordable insurance policy (LPP)
• To provide training to in-house staff in automated methods to resolve consumer complaints and utilize pre-litigation dispute resolution methods to maintain consumer goodwill
• To obtain expert/experienced insurance carrier selected panel counsel to reduce legal and transactional costs
There is no competition in the LPP niche; no insurer is currently offering E&O, CGL or liability coverage for the CAL. The first carrier to offer LPP will secure a new source of premium by providing protection for the $635+ billion CPG market and will be able to upsell its other insurance products.
LSIR suggests that the LPP be offered to 10-20 businesses selling products in California’s $93 billion CPG market. Policy limits, retentions and premiums will be set individually for each business based on the RMP of the products being sold in California. The IA will disclose each applicant’s procedures to comply with Proposition 65. Any applicant that has received a 60-day notice of a violation of Proposition 65 and/or has a violation that has been filed with the California Attorney General will be excluded from the test market.
The LPP is an innovative policy providing new insurance coverage for the CAL. California is the ideal test market for the LPP because it is the world’s fifth largest economy, has the strongest consumer protection laws and is a leader in creating innovative products and service. California’s businesses will buy the LPP to reduce legal and transactional costs of defending the CAL. The LPP will also stop the litigation lottery that is controlled by class action lawyers extracting settlements of meritless cases by threatening to bankrupt the business from the uninsured CAL. The carrier offering LPP to California businesses will create a new profit center and upsell its other products. LSIR developed the LPP and Intellectual Property to successfully bring the LPP to the market in California. Contact LSIR for more information.
1. https://www.selectusa.gov/consumer-goods-industry-united-states, Accessed January 4, 2021.
2. https://advantage.iriworldwide.com/Engineering/covid19/?i=0, accessed August 4, 2020.
3. https://www.statista.com/statistics/187834/gdp-of-the-us-federal-state-of-california-since-1997/, Accessed January 4, 2021.
5. https://oehha.ca.gov/proposition-65/law/proposition-65-law-and-regulations, accessed August 4, 2020.
6. regsart7.pdf, accessed August 4, 2020.
7. https://www.latimes.com/business/story/2020-07-23/prop-65-product-warnings, January 4, 2021.
8. https://classactionsurvey.com/ page 11, accessed August 6, 2020.
9. https://classactionsurvey.com/ page 11, accessed August 6, 2020, and Laufer Specialty I-Risk LLC calculations.
10. https://classactionsurvey.com/ page 15, accessed August 6, 2020.
11. https://classactionsurvey.com/ page 4, accessed August 6, 2020, and Laufer Specialty I-Risk LLC calculations.
12. https://classactionsurvey.com/ page 4, accessed August 6, 2020, and Laufer Specialty I-Risk LLC calculations.
13. https://classactionsurvey.com/ page 4, accessed August 6, 2020.
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