California’s Proposition 65 of the California Safe Drinking Water and Toxic Enforcement Act of 1965, §§ 25249.5 et seq., is a “remedial statute” which, among other things, requires “businesses to warn individuals about carcinogens and reproductive toxins to which they may be exposed through commercial transactions, employment, and the environment.”  Consumer Cause, Inc. v. SmileCare, 91 Cal.App.4th 454 (Cal.App. 2001).  The statute allows private citizens to sue for violations, and to recover civil penalties, injunctive relief, and legal fees.  The past decade has seen an explosion in the number of suits brought under this statute, particularly against manufacturers of allegedly dangerous products.

In its recent decision Ulta Salon, Cosmetics & Fragrance, Inc. v. Travelers Property Casualty Co. of America, 2011 Cal. App. Unpub. LEXIS 4388 (Cal. App. June 10, 2011), the Court of Appeal of California for the Second Appellate District had occasion to consider whether an insured was entitled to coverage under a general liability policy for an underlying Proposition 65 lawsuit.  The lawsuit alleged that numerous manufacturers, distributors and/or sellers of nail products, including Ulta Salon, Cosmetics & Fragrance, Inc. (“Ulta”), violated Proposition 65 because they failed to disclose that their products contained DBP, a chemical known to cause reproductive toxicity.  The lawsuit sought civil penalties of $2,500 per day for each individual exposed to the chemical, as well as injunctive relief preventing the continued sale of such products without proper warnings.

Ulta’s insurer, Travelers, denied coverage on the basis that the underlying suit did not allege bodily injury or property damage, but instead sought only civil penalties and injunctive relief, which are not covered damages under the policy.  Ulta subsequently commenced a coverage action against Travelers, alleging breach of contract and bad faith.  Among other things, it argued that the underlying litigation raised the potential for coverage, such that Travelers had a duty to defend.  The basis for the Ulta’s assertion was that the underlying suit alleged that the plaintiff class had been exposed to DBP.  This exposure, argued Ulta, could “potentially give rise to bodily injury claims,” which under California law, is sufficient to trigger a defense obligation.

While the court acknowledged a broad duty to defend under California law, which extends to a suit “which potentially makes claims within the coverage of the policy,” the court agreed that Travelers had no defense obligation with respect to the underlying Proposition 65 lawsuit.  In reaching this determination, the court found it determinative that the lead plaintiff in the underlying suit did not allege that she had used or had even suffered any injury as a result of exposure to the insured’s product.  Rather, the litigation was limited to a single cause of action based on defendants’ alleged failure to provide “clear and reasonable warnings” as required under Proposition 65.  The penalty for such violation is statutory, explained the court, and does not arise out of any particular bodily injury or property damage.  Accordingly, because the underlying complaint “neither alleged facts giving rise to a claim for damages for bodily injury nor did it allege any bodily injury (or property damage), Ulta did not become legally obligated to pay damages for bodily injury, and the policy was not triggered.”  The court further rejected the insured’s argument that Travelers owed a defense because the “facts on the face of the complaint [could] give rise to potential bodily injury claims.”  Such speculation as to how a third party claimant might amend its complaint at some future date, explained the court, is not sufficient to trigger a present duty to defend.