Tag Archives: food recall

Spilled Milk: District Court Judge Sides with Policyholder in Recall Damages Dispute

By Jonathan Cohen and Aisha Cassis

On January 8, 2013, a Minnesota federal district court granted summary judgment in favor of a policyholder who sought coverage from its commercial general liability insurer for contract damages stemming from the recall of instant milk.  In 2007, the policyholder, Main Street Ingredients (“MSI”), purchased instant milk from Plainview Milk Products Cooperative (“Plainview”).  MSI entered into a contract under which it resold that milk to Malt-O-Meal Company (“MOM”).  MOM incorporated that milk into its instant oatmeal.  In 2009, the Food and Drug Administration detected unsanitary conditions and salmonella at Plainview’s manufacturing facility.  As a result of this, Plainview issued a recall of all instant milk sold from 2007 forward.  This included the milk that MSI sold to MOM that MOM had incorporated into its instant oatmeal products.  That same year, MOM sued MSI and Plainview seeking damages that it had incurred as a result of the recall.  MSI settled with MOM for $1.4 million.  MSI sought both liability and defense costs from its insurer, Netherlands Insurance Company (“Netherlands”), which had defended the claim under a reservation of rights.

On March 2, 2011, Netherlands filed a declaratory judgment action (The Netherlands Insurance Company v. Main Street Ingredients, LLC, et al., No. 11-533, 2013 U.S. Dist. LEXIS 2685 (D. Minn.)), against MSI seeking a declaration that it had no duty to defend or indemnify MSI.  MSI counterclaimed that Netherlands was required to do so.  Both parties moved for summary judgment, and the Court sided with the policyholder on each issue.

First, the Court held that, although the underlying litigation stemmed from a breach of contract dispute, there had been an occurrence under the policy because (i) the contractual liability itself arose from the recall of the instant milk and (ii) there was no evidence in the record suggesting that MSI intended to injure MOM.

Second, the Court held that the known loss provision could not operate to preclude coverage where MSI did not have knowledge of the damage until it received the recall notice from Plainview.  This did not occur prior to Netherlands’s policy period.

Third, the Court found that property damage was present regardless of the fact that the instant milk had never tested positive for salmonella.  Additionally, the Netherlands policy provided coverage not only for property damage, but also for damages incurred because of property damage.  Thus, the damages included costs stemming from MOM’s destroyed inventory, credits and fees to customers, recall freight and additional costs.

Finally, the Court refused to apply the “your product,” “impaired product,” or “recall” exclusions because none of those exclusions barred coverage for damages associated with a third party’s product.  Notably, the Court cited well-established New Jersey case law that establishes the “recall” exclusion “has no applicability when the claim is for property damage claimed to have been suffered by another property owner.” Id. at *18 (citation omitted).

This decision should give food companies further support in seeking coverage for liabilities arising out of product recalls.

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Hot Stuff and Little Lady: Two Food Recall Insurance Coverage Cases with Two Different Outcomes

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.