By Jonathan Cohen
A U.S. district judge in South Dakota has recently interpreted a provision of an accidental product contamination insurance policy in favor of the policyholder, finding that a recall resulting from the failure to include monosodium glutamate (MSG) on a product label constituted “accidental contamination” because MSG “may likely result in physical symptoms of bodily injury, sickness or disease or death of any person.”
This ruling marks a major win for policyholders, particularly because of the judge’s careful and convincing analysis of the terms of the policy in question and because the decision contrasts with another recent decision that had rejected coverage in similar circumstances.
Hot Stuff, a sausage manufacturer, had an insurance policy with Houston Casualty Company (HCC), covering it for expenses it incurred in connection with product tampering or product contamination. Due to a packaging error by Hot Stuff, sausages containing MSG were labeled as not containing it. Hot Stuff initiated a recall. It designated the recall as a Class III recall, which the FDA defines as involving products that “will not cause adverse health consequences.” Hot Stuff then turned to its insurer for coverage of the recall-related expenses. It contended that MSG was a contaminant under the policy’s terms and that it could cause bodily injury.
HCC denied the claim, and at trial it pointed to expert testimony that MSG likely could not cause bodily injury.
After Hot Stuff brought a declaratory judgment action and moved for partial summary judgment, Chief Judge Karen E. Schreier of the U.S. District Court for South Dakota ruled in Hot Stuff’s favor that its expenses were covered by insurance.
The court found that the correct inquiry was whether the policy terms providing coverage for a product that “may likely” cause illness would be satisfied if there were any possibility of illness resulting from the ingestion of MSG — or whether illness needed to be “a probability” for the coverage to be triggered. Under the plain reading of the policy, the court found that coverage would exist “if any person could experience physical symptoms of bodily injury, sickness or disease as a result of his or her exposure to the MSG-containing sausage.”
The judge found that even the insurance company’s expert agreed that, for a small subset of the population, physical symptoms possibly could result – and that was all that was required.
Alternatively, the court also found that since the term “may likely” in the insurance policy was ambiguous, any ambiguity must be resolved in favor of the insured. It was ambiguous because the word “may” refers to a possibility or a slight chance, while the word “likely” refers to a distinct probability.
The court’s decision in Hot Stuff is both a sensible result, given the language of the insurance policy, and a positive development upon which policyholders should rely when addressing coverage under recall policies.
The decision should give policyholders comfort, especially in contrast with the ruling of a judge in the U.S. District Court for the Northern District of Illinois in another recent case, Little Lady Foods, Inc. v. Houston Casualty Co., No. 10 C 8280 (N.D. Ill. Sept. 22, 2011),
In that case, a food manufacturer recalled its product after testing revealed the presence of bacteria within the Listeria genus, which includes seven strains of bacteria. At the time of the recall, the company did not know whether the Listeria present in the product was the one strain of Listeria, Listeria monocytogenes, that causes bodily injury. After the recall, tests concluded that the Listeria that was present in the product was not the strain that could cause bodily injury. Based on these later tests, the court concluded that the recall did not trigger the policy’s requirement that the recall resulted from contamination that “may likely result in bodily injury.”
The Hot Stuff court distinguished Little Lady because it found that the undisputed evidence in the case proved that MSG might cause injury, whereas the Listeria at issue in Little Lady had no meaningful possibility of causing injury.
The Hot Stuff and Little Lady cases demonstrate that food companies considering recall coverage need to be vigilant about ensuring that they have the best possible coverage language to avoid the issues raised here. Companies also should not be daunted by an insurer’s efforts to avoid payment under its policies. There often are strong counterarguments to insurers’ positions that can lead to a successful outcome for the policyholder.