This week brought a significant litigation development in the tainted product context, which may have important implications for insurers of major toy manufacturers and retailers. Specifically, with the holiday shopping season approaching, authorities in California have launched a major enforcement suit addressing lead exposure from children's toys. The suit reflects an effort to fill a gap in consumer protection created by the U.S. Consumer Product Safety Commission, according to state authorities.

On November 19, 2007, California Attorney General Edmund G. ("Jerry") Brown and the Los Angeles City Attorney, Rocky Delgadillo, filed a suit in the California Superior Court for Alameda County seeking a broad range of relief against twenty toy manufacturers and retailers, alleging that these companies knowingly exposed children to lead in toys and failed to provide warning of the risk of exposure to lead. The suit is brought under California's Safe Drinking Water and Toxic Enforcement Act of 1986, known as "Proposition 65." This statute provides, among other things, that no person doing business in California shall knowingly and intentionally expose any individual to a chemical known to cause cancer without first giving a clear and reasonable warning. Pursuant to the statute, the State of California initiated the suit after several entities expressed their intention to file private attorney general suits.

Mr. Delgadillo stated that the purpose of the suit is to ensure that the companies eliminate lead and other toxic materials from all toys, and Mr. Brown announced that the State would enter into settlement negotiations with the defendants to put into place effective monitoring of the relevant supply chains. The complaint also seeks civil penalties of $2,500 per toy sold per day, and additional relief, including injunctions and costs of suit.

To the extent that suits such as this one are tendered to liability insurers, numerous challenging coverage issues will arise. Among these are whether coverage exists for so-called "no injury" claims; whether civil penalties, injunctive relief, and other non-damages relief are covered; whether coverage terms and exclusions concerning knowledge and intent preclude coverage; and whether public policy, such as the policy reflected in Section 533 of the California Insurance Code, precludes coverage.

The twenty defendants in the suit include Mattel; Fisher-Price; Michaels Stores; Toys "R" Us; Wal-Mart; Target; Sears; KB Toys; Costco; A&A Global Industries; RC2 Corporation; Eveready Battery; Kids II; Kmart; Marvel Entertainment; and Toy Investments, Inc.