The obvious concern for many companies facing potential exposure for a Prop 65 violation is what is this going to cost me? The short answer: a lot. The potential for high civil penalties is daunting to many companies, a fact of which private litigants are well aware and bank on to incentivize quick settlements.
Prop 65 authorizes monetary penalties of up to $2,500 “per day for each violation …” In determining how much to assess for each violation, a trial court considers:
- the nature and extent of the violation;
- the number of, and severity of, the violations;
- the economic effect of the penalty on the violator;
- whether the violator took good faith measures to comply with this chapter and the time these measures were taken;
- the willfulness of the violator’s misconduct;
- the deterrent effect that the imposition of the penalty would have on both the violator and the regulated community as a whole; and
- any other factor that justice may require.
The sliding scale of the penalty amount generally means that any violators who act quickly to remedy problems and are perceived as cooperating are unlikely to be on the hook for the full $2,500, which is reserved for actors that willfully disregard warning requirements. However, the multiple factors give courts considerable leeway in determining the amount of penalties.
Violation, defined (or not)
What is a violation? Surprisingly, neither the statute nor the regulations define a violation for the purposes of penalties, leaving the question somewhat ambiguous. Courts generally interpret one “violation” for each product unit that does not contain an adequate warning, although there is no controlling or definitive opinion on the subject. As you can well imagine, the amount of penalties can add up very quickly for even small inventories.
As we will discuss more in a future post about the parties that bring these lawsuits, private litigants can receive 25% of any civil penalties collected (not to mention attorneys’ fees), providing a large incentive for them to maximize the number of violations alleged and the amount of penalties assessed per violation.
Applicable statute of limitations
Penalties for Prop 65 violations are governed by California’s one year statute of limitations for statutory penalty actions, Code of Civil Proc. § 340. Plaintiffs will often argue that violations accrue for any units sold without warnings going back one year prior to the date of the Prop 65 60-day notice or the date of the complaint.
Lack of insurance coverage
One of the nasty little sidenotes for penalties is that insurance policies will usually not cover them, leaving the company to pay the penalties completely out of pocket.
Coverage claims brought under standard form commercial general liability (CGL) insurance policies, which typically cover claims arising from bodily or personal injury, will usually be denied by insurers who argue there is no coverage because Prop 65 claims almost never allege bodily injury.
Many policies will also not cover civil penalty actions based on the implication that the business has violated the law when civil penalties are sought.
Of course, an analysis should be made of existing insurance policies to determine whether coverage exists because there could be exceptions. For example, directors’ and officers’ (D&O) policies, which frequently provide coverage for a company’s own wrongful acts, could have provisions broad enough to encompass a failure to warn.
The bottom line, however, is that standard insurance policies will typically exclude coverage for civil penalties.