7th Circuit: insurers not liable for defense in Four Loko lawsuits

By Andrew Thomason | Dec 18, 2013


The company behind a notorious alcoholic energy drink lost a battle this week against its own insurance companies.

The U.S. Seventh Circuit Court of Appeals on Monday upheld a lower court's ruling that Phusion Projects, the maker of Four Loko, is not covered by its insurance policies when it comes to a handful of lawsuits against the company.

Phusion, a Chicago-based company, bought a commercial general liability insurance policy from the Netherlands Insurance Co., as well as a commercial umbrella liability insurance policy from Indiana Insurance Co.

Both policies have identical liquor liability provisions excluding coverage for bodily injury or property damage where Phusion could be held liable because of causing or contributing to the intoxication of someone.

The ruling from the federal appeals panel highlights five lawsuits in which a person died or was injured after they or someone they were with drank Four Loko, an alcoholic drink most notable for its inclusion of stimulants like caffeine, guarana, taurine and wormwood.

One of those cases settled and was not addressed in the appeal. The plaintiffs in the remaining suits claim Four Loko caused, in whole or in part, their injuries.

Two of the cases involve the same car accident in which the driver had been drinking Four Loko. Another case involves a man who drank Four Loko before tinkering with a gun and shooting himself. In the last case addressed in the opinion, a man alleges he had a panic attack after drinking Four Loko that caused him to run into a street and get hit by a car.

After Phusion notified its insurers about the lawsuits, the insurers filed complaints in Chicago's federal court seeking a declaratory judgment that their policies do not cover the lawsuits.

The insurers cited the liquor liability provision of both of Phusion's policies, claiming it absolved them of liability coverage in the five cases because the injuries were a result of intoxication.

Both parties moved for summary judgment and the district court sided with the insurers, finding that they were exempt from defending Phusion against the suits based on their policies' liquor liability provisions.

On appeal, Phusion argued that the district court misinterpreted the liquor liability provisions by interpreting the exclusion too broadly, and erred by misinterpreting the original complaints too narrowly. It insisted a plain reading of the provisions shows that it is covered in the underlying cases by the policies.

A federal appeals panel made up of Judges William Bauer, Michael Kanne and David Hamilton disagreed in its recently released 13-page opinion.

"Even if there might be some difference between 'arising out of' and 'by reason of' in some instances, Phusion has failed to articulate how the phrase 'by reason of' would limit the scope of the Liquor Liability Exclusion in this case,"  Bauer wrote for the court.

The panel also rejected Phusion's other argument that the original complaints regarding injury or death were at their core stimulant liability cases, and not alcohol liability cases.

The "Liquor Liability Exclusion should apply to Four Loko the same way it applies to all other alcoholic beverage and the addition of stimulants is irrelevant in determining" the insurers' duty to defend the cases, the federal appeals court held.

Writing for the court, Bauer added that Phusion Products had the opportunity to purchase insurance that would clearly cover them in the underpinning cases, but decided against it.

Four Loko rocketed to notoriety in 2010 as a rash of college students ended up hospitalized after drinking the beverage. Since then the U.S. Food and Drug Administration banned the sale of caffeinated alcoholic beverages. Four Loko was reformulated and is still on the market.

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