Insurance coverage issues arising from large exposure contaminated food claims: complex issues of fact and insurance law come into play when food goes bad, and claims for contamination and recall arise on several fronts.

AuthorBrowning, Charles W.

TRY THESE cases on for insurance coverage:

* 15 million pounds of processed chicken breasts shipped to various food processors and allegedly contaminated with Listeria.

* Two million pounds of ground beef allegedly contaminated with E-coli bacteria shipped and sitting on the shelves of supermarkets.

* Thousands of cases of bottled iced tea distributed and ready for sale but allegedly contaminated with glass particles.

* Wood splinters discovered in thousands of boxes of cereal.

Insurance coverage issues arising from these high-exposure contaminated food claims differ markedly depending on the role of the policyholder involved, the type of insurance policy under which coverage is sought and, of course, the specific terms and exclusions of the policies at issue. Sorting out the covered aspects of claims, if any, and then ascertaining their value, as opposed to the non-covered aspects, is a complex and time-consuming process. As a further complication, there is surprisingly little guidance from appellate case law on coverage issues in the context of contaminated food claims. Reference to insurance case law in general is necessary.

Let's focus on the coverage issues that may arise from contaminated food claims by third parties under commercial liability policies, with specific reference to the ISO form CGL 00 01 01 96, and highlight the insurance products in the marketplace that are specifically related to contaminated food claims.

COVERAGE ISSUES

The insuring agreement in the ISO standard CGL policy provides that the carrier "will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies." The policy defines property damage as:

(1) Physical injury to tangible property including all resulting loss of use of that property; or

(2) Loss of use of tangible property that is not physically injured.

  1. Property Damage

    American courts have adopted the argument that food products have suffered "physical injury" when they are in technical violation of U.S. Food and Dug Administration (FDA) regulations, but are still fit for human consumption. (1) Thus, it is likely (and logical) that in most situations the specific contaminated food item has sustained some form of "physical injury." That usually is not material, however, because a claim for damage to a policyholder's own product, standing alone, is excluded from coverage under third-party liability policies.

    More important, contaminated food claims often are alleged against the original food processor or food company by entities further down the product chain that incurred economic loss because of the contaminated food. Those entities include others that further processed the allegedly contaminated food, packagers of the contaminated food, and the retailers that purchased and perhaps sold the contaminated food.

    When those types of entities make a claim for damages against the policyholder who was the original food processor, one should determine whether the claim was "because of property damage" as required by the policy. This is especially so because pure economic loss--a loss of value--generally is not physical injury to tangible property or loss of use. (2)

    An interesting coverage case involving a contaminated food claim addressed this point. In United States Fire Insurance Co. v. Good Humor Corp., (3) the policyholder recalled ice cream pursuant to a recommendation of the FDA. The recall caused significant expense to the policyholder's customers, who brought suit for reimbursement. The carrier contested coverage, asserting that no property damage resulted.

    By only the thinnest of threads, the Wisconsin Court of Appeals concluded that there was property damage sustained by the customers. Under a duty to defend standard, the court determined that the "loss of use of storage space" from storing the recalled ice cream was a loss of use of tangible property and not an economic loss. Thus a defense was owed. It is unclear how this issue would have been decided by the court in the context of the duty to indemnify.

    At least one California Court of Appeal, in a well-known decision, Armstrong World Industries Inc. v. Aetna Casualty & Surety Co., (4) has concluded that "physical injury" exists in a building without the release of any asbestos fibers. The broader conclusion drawn from Armstrong--that the simple incorporation of a defective product into another constitutes property damage to the integrated product--has been adopted by the California Court of Appeal in a contaminated food case, Shade Foods Inc. v. Innovative Products Sales & Marketing Inc. (5)

    In Shade Foods, the policyholder processed and then supplied nut clusters to General Mills to be added to breakfast cereals. Wood splinters were discovered in the diced almonds supplied, causing General Mills to shut down production, destroy the boxes of cereal in its possession, and ship the unused clusters back to Shade.

    The Shade court had "no difficulty" finding property damage in that situation, rejecting the carrier's argument that General Mills's claim against Shade was for diminution of a product's value because of a defective part or faulty workmanship. The court concluded that the presence of wood splinters in the almonds caused property damage to the nut clusters and cereals in which the almonds were incorporated.

    To some extent, the Shade and Armstrong decisions butt heads with the long line of cases holding that the definition of "property damage" does not extend to the diminution of value of products that have merely incorporated a defective product or defective work. As stated by the Indiana Court of Appeals in Aetna Life and Casualty Co. v. Patrick Industries Inc., "The concept of incorporation should not be extended so that physical injury will be deemed to occur every time a defective component is integrated into another's tangible property." (6)

    Defense counsel should be alert to the issue of whether property damage occurred when addressing a contaminated food claim.

  2. Bodily Injury

    Although exposure to contaminated foods may cause "bodily injury, sickness or disease," there likely will be situations--especially in the mass tort context--in which many claimants have not suffered bodily injury; they merely may have suffered emotional distress or fear that they will develop bodily injury from exposure to such foods. Most courts have held that such claims do not satisfy the definition of bodily injury. (7)

  3. Occurrence

    The 1996 ISO CGL form defines an occurrence as "an accident, including repeated exposure to substantially the same general harmful conditions."

    An accident, according to decisions, is merely an unanticipated event, an undesigned contingency. (8) Courts also have held that the failure of the policyholder to provide an adequate product or adequate work does not constitute an accident. (9) It also has been held that a pure economic loss is not an accident. (10) Many courts, however, have concluded that when an insured's defective work or product has injured some other property, there is an occurrence. (11)

    The seminal case reflecting the view that a faulty product or workmanship is not an accident is Weedo v. Stone-E-Brick Inc. (12) There the New Jersey Supreme Court was confronted with a common situation--a dissatisfied property owner complaining of the unworkmanlike performance of a construction contract. Quite succinctly, the court laid down the rule that a CGL policy "does not cover an accident of faulty workmanship, but rather faulty workmanship which causes an accident."

    Distinguishing between coverage that is excluded for business risks and included for accidents, the Weedo court offered an example in which a craftsman applies stucco to an exterior wall of a home in a faulty manner, with discoloration, peeling and chipping resulting. In that situation, it concluded, the poorly performed work will have to be replaced or repaired by the tradesman or by his surety. On the other hand, if the stucco peeled and fell from the wall, thereby causing injury to the homeowner or his neighbor standing below, an occurrence arises which is the proper subject of a general liability policy.

    Weedo concluded that there is a moral hazard in providing liability insurance coverage for the repair or replacement of faulty workmanship or a faulty product, as the policyholder will have little or no incentive to perform or produce in a workmanlike manner. To the extent that a policyholder seeks coverage for a contaminated food claim by a party asserting damage simply because the product or work contracted for was faulty, in most jurisdictions, there would be no occurrence as there would be no accident.

  4. Potential Exclusions

    1. Intentional Acts

      Absent the intentional contamination of food by the policyholder or its employees, the CGL exclusion for expected or intended bodily injury or property damage generally does not lend itself to the typical contaminated food claims. The exception, however, is to the extent that such claims also include allegations of fraud, misrepresentation and/or violation of consumer and trade practices acts. Coverage for those allegations may be precluded by this exclusion to the extent that the policyholder has liability for such allegations.

    2. Property Damage to "Your Work" or "Your Product"

      The 1996 ISO CGL policy form excludes coverage for property damage to "your work" or "your product." These exclusions generally preclude coverage for so-called business risks, which are risks arising from the normal, frequent and predictable consequences of doing business, and which business management can and should control and manage. (13) Courts frequently express the view that excluding such business risks from coverage is in the public interest because doing so motivates management to better operate the business.

      The your work and your product exclusions draw the line between covered and...

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