Property Damage and Product Recall
February 11, 2013
The insurance company filed a motion for summary judgment based on a coverage dispute arising out of a recall of instance milk. This case is The Netherlands Insurance Company v. Main Street Ingredients, LLC, 2013 WL 101876.
Main Street Ingredients (MSI) purchased instant milk from Plainview Milk Products Cooperative and resold the milk to America Cereal Corporation, a subsidiary of Malt-O-Meal Company (MOM). In 2009, the Food and Drug Administration detected unsanitary conditions and salmonella at the Plainview manufacturing facility. As a result, Plainview issued a recall of all instant milk dating back to 2007, including the milk MSI sold to MOM. As a result, MOM initiated a recall of its instant oatmeal. At no point, however, did MSI's instant milk test positive for salmonella.
In 2009, MOM filed a lawsuit against MSI seeking damages resulting from the recall. MSI notified Netherlands, its insurer. Netherlands agreed to defend MSI under a reservation of rights. MSI and MOM settled the underlying action but prior to settlement, Netherlands filed an action seeking a declaration that it had no duty to defend or indemnify MSI.
The U.S. District Court (Minnesota), said that MSI had to demonstrate an occurrence, that the loss was not known prior to the policy period, and that property damage occurred.
The insurer argued that the underlying action was premised on a breach of contract and that failure to comply with contractual obligations cannot constitute an occurrence. The court said that there is an occurrence as long as the insured did not engage in conscious wrongdoing. Here, there was no evidence that MSI intended to injury MOM. Therefore, the court found that the recall of the instant milk was an occurrence.
As for the known loss argument, the court ruled that the damage occurred when the instant milk was blended into the oatmeal between January 2, 2008 and June 4, 2009. Netherlands presented no evidence that anyone from MSI was aware of the damage until MSI received notice of the recall from Plainview on June 23, 2009. Therefore, MSI did not have knowledge of the damage prior to the 2008 and 2009 policy periods.
Because the instant milk never tested positive for salmonella in the underlying action, the insurer argued that there was no property damage; Netherlands said that regulatory measures, such as a recall requirement, are insufficient to demonstrate property damage absent a finding of actual contamination. The court ruled that the policy language covered “physical injury”, and since the oatmeal was physically affected since it included instant milk that was manufactured in unsanitary conditions, there was property damage. Moreover, under Minnesota, the court found that the inability to lawfully distribute products because of FDA regulations is an impairment of function and value sufficient to support a finding of physical damage. So, property damage was present in this case.
Netherlands then argued that several exclusions applied.
The first exclusion claimed was the damage to “your product” exclusion. Netherlands said that the exclusion applies because the instant milk was MSI's product. The court found that MSI actually sought coverage for damage to a third party's product, the damage to the MOM oatmeal caused by the inclusion of the milk from MSI. As a result, the exclusion was not applicable.
The insurer then said that the impaired property exclusion applied. However, the definition of impaired property clearly stated that property is not impaired if it can be restored to use by the repair or removal of the named insured's product. In this instance, the adulterated milk could not possibly be removed from MOM's oatmeal since the ingredients were inextricably blended together. The instant oatmeal was not impaired property by definition and the exclusion did not apply.
The final argument put forth by the insurer was that the recall exclusion precludes coverage. Netherlands said that MSI is seeking coverage for recall of the instant milk, not the oatmeal. MSI responded that it is seeking indemnity for damages from MOM's recall of the oatmeal. The court agreed with the insured.
The court ruled that Netherlands did not establish its case and a declaratory judgment in favor of MSI is warranted.
Editor's Note: The United States District Court, Minnesota, ruling in favor of the insured, found that damages for a food recall claim were covered by the liability policy.
The complaint in the underlying action was for destroyed inventory, credits and fees to customers, recall freight and additional costs, all of which the insurer said were purely economic damages, not property damage. However, the court said that the policy covered damages that the insured must pay because of property damage, and although lost profits or other consequential damages do not constitute property damage, the court saw these as sums for which the insured may be liable because of property damage. A third party's product was physically affected by the insured's product and the former was recalled. To the district court, this was property damage, and the policy applied.