Does knowledge need to be possessed by senior managers?
Section 533 of the Insurance Code provides that insurers are not liable for losses caused by the insured’s willful act. A recent case explored whether it should be the company’s senior managers possessing the knowledge that the provision requires.
In Certain Underwriters at Lloyd's, London et al. v. ConAgra Grocery Products Co. et al., the People – acting through the county counsel of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano, and Ventura and through the city attorneys of Oakland, San Diego, and San Francisco – brought a complaint against former manufacturers of lead paint.
The underlying complaint alleged that the lead in paint and coatings in California homes and buildings created a public health crisis and that the lead paint manufacturers, despite knowing for almost a century that the use of lead was dangerous, created and/or helped with the creation of a public nuisance by promoting lead for interior and exterior use.
Read more: Protect your company from Cal/OSHA violations
ConAgra Grocery Products Company, as W.P. Fuller & Co.’s successor; NL Industries, Inc.; and the Sherwin-Williams Company were found jointly and severally liable and were ordered to pay $1.15 billion into a fund dedicated to abating the nuisance.
The insurers argued that they had no duty to provide coverage for ConAgra’s payment to the abatement fund. As for ConAgra, it made the following arguments:
- Because s. 533 made a distinction between the insured and its agents, the term “the insured” would apply only to the corporate entity’s conduct and knowledge;
- The findings in the underlying case did not establish that Fuller acted with the knowledge required for s. 533 to apply;
- Only evidence providing that senior management was substantially certain that its promotions would result in the loss for which indemnity was sought could establish that Fuller had knowledge, and no such evidence was presented.
The trial court decided that ConAgra was not entitled to indemnity from its insurers based on s. 533. It rejected ConAgra’s contention that the insurers were required to and failed to prove that Fuller’s senior managers knew about lead paint’s hazards.
The California Court of Appeal for the First District affirmed the trial court’s judgment. It was not convinced by ConAgra’s argument that s. 533 would only apply if it was shown that Fuller’s management had the required knowledge and expectation of damage.
The courts’ opinions in the underlying case did not suggest that ConAgra’s liability was based on Fuller’s vicarious liability for employees’ acts instead of being based on Fuller’s own acts as a corporation, the appellate court held. Rather, the underlying case established that Fuller, as a corporate entity, had actual knowledge of the harms associated with lead paint.
The cases that ConAgra cited did not reflect any requirement that a party could only show the corporation’s knowledge using proof of the knowledge of high-level corporate managers, for the purposes of s. 533, the appellate court concluded.
Learn more at Employment Law Masterclass California.