Filed Under:Risk Management, Loss Control

Something’s fishy: Scallops spoiled, but will coverage provide the net?

Seafood, especially shellfish, are one of the food categories that is most vulnerable to spoiling, usually from not keeping the temperature constant while the seafood is in transit or storage. (Photo: Shutterstock)
Seafood, especially shellfish, are one of the food categories that is most vulnerable to spoiling, usually from not keeping the temperature constant while the seafood is in transit or storage. (Photo: Shutterstock)

This story is reprinted with permission from FC&&S Legal, the industry’s only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

An appellate court in Massachusetts, reversing a trial court’s decision, has ruled that a seafood processing facility was entitled to insurance coverage for claims that nearly 60,000 pounds of scallops had spoiled while in its possession, even though the cause of the damage was unknown.

In July 2011, scallops processed by Raw Seafoods, Inc. (RSI), a seafood processing facility in Fall River, Mass., were on their way through customs in Denmark, heading to a customer of Atlantic Capes Fisheries, Inc. Upon inspection, the 37,102 pounds of scallops were found to be decomposed, exhibited a strong ammonia smell, and were deemed unacceptable for human consumption.

The U.S. Food and Drug Administration tested the scallops and confirmed that they were spoiled.

The scallops then were returned to Arctic Cold Storage’s facility, where representatives from Atlantic and RSI jointly inspected the shipment and confirmed the damage. They also inspected another batch of scallops, processed by RSI for Atlantic around the same time as the rejected batch, and discovered approximately 20,000 additional pounds of damaged product.

In 2012, Atlantic sued RSI in the U.S. District Court for the District of Massachusetts; its complaint included a count for negligence for the damage to the scallops.

At that time, Hanover Insurance Group, Inc., which had issued a commercial general liability (CGL) insurance policy to RSI, agreed to defend RSI in the Atlantic litigation, while reserving its right to deny coverage under the policy.

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‘Unknown failure’


During discovery, RSI’s president, Jason Hutchens, acknowledged that the scallops had been delivered to RSI in good condition, but that “somewhere in [RSI’s] system, the product got messed up.” It was undisputed that the damage had occurred while the scallops had been in RSI’s possession, but the precise cause of the damage at RSI’s facility was not known.

Hutchens stated that “we’ve never seen anything like this before ... we beat our heads against the wall for, it seemed like months, trying to figure this out. We’ve never seen anything like it and haven’t seen anything after this problem. But we can’t put our hands around it, how it happened and why it happened — we don’t know.”

Nonetheless, he agreed that, to his understanding, “[t]he damage occurred in [RSI’s] custody” and “was the result of some, as yet, unknown failure on the part of [RSI’s] processing people or handling people within [RSI’s] plant.” He further agreed that the damage to the scallops could have occurred because someone failed to “maintain temperatures carefully enough.”

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Atlantic moved for summary judgment under the doctrine of res ipsa loquitur [“The thing speaks for itself”] arguing that:

  • It was undisputed that Atlantic had delivered the scallops to RSI in good condition;
  • RSI had exclusive control over the scallops until they had been delivered to Arctic in a frozen state;
  • The scallops had not been damaged after they had been delivered to Arctic;
  • Although the precise cause of the damage was unknown, RSI had accepted responsibility for damaging the scallops; and
  • The damage only could have been caused by RSI’s negligent handling of the product.

Atlantic further contended that although it could not conclusively establish precisely where in RSI’s handling the scallops had been damaged, the most likely cause was “temperature abuse” caused by “RSI’s personnel’s failure to monitor the temperature in some vats of scallops.”

The district court granted Atlantic’s motion for summary judgment and issued a judgment against RSI and in favor of Atlantic in the amount of $599,790.08 with post-judgment interest.

Debate over ‘occurrence’


While the Atlantic litigation was pending, Hanover asked a Massachusetts state court to declare that the damage to the scallops had not been caused by an “occurrence” within the meaning of the policy, or that the damage to the scallops fell under one or more exclusions to the policy, such that Hanover had no duty to indemnify RSI for any judgment in the Atlantic litigation.

The applicable policy provided that Hanover would pay “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ caused by an occurrence.

The policy went on to define an occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

In granting summary judgment in favor of Hanover, the trial court concluded that “because there was no demonstrated accident distinct from [RSI’s] performance of its work,” RSI could not meet its burden of proving that its claimed loss had been caused by an “occurrence.”

RSI appealed.

‘Unanticipated mishap


The appellate court, applying Massachusetts law, reversed.

In its decision, the appellate court explained that although the precise cause or mechanics of the damage to the scallops was unknown, the summary judgment record supported the conclusion that the damage had resulted from an “unanticipated mishap during RSI’s processing operation.”

The appellate court noted that Atlantic was “a consistent RSI customer” for which RSI handled approximately four million to six million pounds of scallops per year, and that in the nearly 17 years RSI had been in business, it had “never seen anything like this before ... and [had not] seen anything after this problem.” In other words, the appellate court said, “viewed in the light most favorable to RSI, the damage resulted from an accident, and not from a routine consequence of RSI’s work.”

The appellate court was not persuaded by Hanover’s argument that, even assuming that the damage resulting from RSI’s mishandling of the scallops was atypical or even anomalous, absent evidence to the contrary RSI only could speculate that the damage had stemmed from unintended conduct. The appellate court reasoned that although the precise cause and mechanism of damage had not been established, Atlantic had prevailed in its litigation on a theory of res ipsa loquitur – a “way of establishing negligence.”

The appellate court concluded that because the basis for RSI’s liability had been established in the Atlantic litigation, which went to judgment, Hanover was “bound by that ground” and could “not relitigate factual issues decided in the underlying case.” The appellate court also pointed out that Hanover had not attempted to intervene in that litigation. 

Accordingly, the appellate court concluded, the trial court had erred in allowing Hanover’s motion for summary judgment.

The case is Hanover Ins. Group, Inc. v. Raw Seafoods, Inc.

Related: Is your product recall covered? Probably not

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.

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