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

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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.