What Constitutes ‘Physical Loss’ for Property Insurance?

by Zelle LLP
Contact

Insurance Law360
April 4, 2016

In determining whether a property insurance policy responds to a loss, the fundamental, threshold question to be answered is whether or not the policyholder sustained “physical loss or damage” to insured property. In the absence of “physical loss or damage,” property insurance does not respond.

In the context of claims where a policyholder alleges loss or damage to food or beverage products, the question of whether the product has sustained “direct physical loss or damage” can be particularly thorny. Food and beverage manufacturers facing economic losses arising out of the “loss” of products have strong incentives to argue that something less than actual, physical, present direct physical loss or damage triggers coverage. For instance, some manufacturers have argued that the inability to distribute or sell products, even for reasons not arising out of any physical loss or destruction, constitutes qualifying loss or damage. Others have argued that the potential for future physical loss or damage triggers property coverage. A key problem with these arguments, however, is that they seek to read the word “physical” right out of policies.

In recent years, several courts construing liability policies have declined to find coverage in cases involving food products and other products intended for human consumption where physical loss, damage, or injury was not present. Just this month, Wisconsin’s highest court determined that the incorporation of the incorrect species of bacteria into probiotic supplement tablets did not constitute “physical injury to tangible property” or “property damage” caused by an “occurrence.[1] Similarly, a federal court sitting in California held that there was no “physical injury to tangible property” triggering coverage under a liability policy where cans of tomatoes were pulled from distribution because of a “‘risk’ that they would develop problems” at some point in the future.[2]

While these cases addressed the “physical” loss or damage in the context of liability coverage, a recent Massachusetts case suggests that the same analysis applies in the property insurance context. In HP Hood LLC v. Allianz Global Risks US Insurance Company, a three-judge panel of the Massachusetts Appeals Court affirmed summary judgment in favor of a property insurer, holding that Hood’s policy excluded coverage for a claimed loss of 1.8 million bottles of Myoplex, a dairy-based, aseptically-packaged beverage product formulated and bottled by Hood.[3] In January of this year, the Commonwealth’s Supreme Judicial Court declined to grant Hood’s request for further appellate review, and the Hood case now stands as one of a small number of decisions across the country that have addressed the availability of property insurance coverage for product-related quality issues in the context of food and beverage manufacturing.

In Hood, the policyholder sought coverage under a property insurance policy for claimed product losses arising out of a Myoplex packaging run that did not go as planned. Two days into the May 2009 run, Hood observed that a bottle that had been filled and sealed by its sophisticated “smart” filler machine failed a “secure seal test.” Hood used the elective “SST,” a destructive test performed by puncturing and pressurizing tested bottles, as a means of predicting whether the bottles’ hermetic seals might fail at some point in the future upon being exposed to the rigors of commerce. Concluding that the SST failure was isolated, Hood allowed the run to continue. Later in the run, Hood experienced additional SST failures and subsequently halted production. After conducting additional testing, which yielded additional SST failures, Hood determined that it could not identify through nondestructive means which bottles, if tested, would fail SSTs. Together with its business partner, with whom Hood had contracted to formulate and package the Myoplex, Hood determined that all 1.8 million bottles packaged during the May run were unsalable. Hood later destroyed the entire run.

After an extensive, months-long investigation, Hood concluded that the cause of the SST failures was a defect in the bottles’ caps, which had been purchased from a third-party supplier. The cap defect involved the degradation of lubricant in the caps’ lining over time which affected the amount of torque needed to apply the caps. A small number of caps were applied with an amount of torque insufficient to achieve a hermetic seal that would withstand the pressure applied during SST testing.

Notably, the SST was not part of Hood’s U.S. Food and Drug Administration-mandated testing protocol and was not recognized by authorities as a criterion for determining whether the bottles’ hermetic seals were intact for purposes of releasing them for sale. In fact, every Myoplex bottle that was tested passed FDA-mandated seal integrity tests, and Hood’s own process authority (its liaison with the FDA) concluded that the Myoplex packaged during the May 2009 run could have been released to normal distribution. Further, post-packaging testing and visual inspections revealed that the Myoplex liquid had been formulated properly and did not become contaminated. Nevertheless, Hood made a business decision not to sell the output from the ill-fated run.

The policy at issue in Hood provided coverage for “all risks of direct physical loss or damage” to insured property “provided that such physical loss or damage occurs during the policy period.” In the context of cross-motions for summary judgment, Allianz argued that Hood had not satisfied its threshold burden to establish coverage under the policy because nothing “happened” to the Myoplex; that is, the insured property at issue had not been worked upon by any external force that altered the condition of the property. To the contrary, the Myoplex had rolled off the bottling line in a defective condition and did not change. Moreover, neither the Myoplex liquid nor its packaging had been harmed in any way. Further, Allianz argued that, at most, Hood alleged only the unrealized potential that at some point in the future, the bottles’ hermetic seals might have failed when released to commerce. Allianz argued that the risk of a potential future loss did not satisfy the policy’s requirement of actual, direct physical loss or damage. For its part, Hood urged that, particularly in the context of claimed food and/or beverage product losses, something short of actual physical loss or damage, including the “unsaleability” of a product, was sufficient to trigger coverage.

While the Superior Court effectively rejected the notion that “unsaleability” constituted “direct physical loss or damage,” the court concluded that the risk that the bottles’ seals may have failed in the future was sufficient to give rise to coverage in the first instance. In so holding, the court, adopting Hood’s interpretation of the policy’s “all risk” language, reasoned that since the policy covered “all risks of physical loss or damage,” the risk of potential future damage came within the policy’s coverage.

Although the Appeals Court did not decide the issue of whether Hood had established “direct physical loss or damage” under the policy, the panel very clearly rejected the notion that so-called “all risks” policies cover all losses, including those where there is no actual physical loss or damage:

Hood additionally argues that the policy was intended to cover increased risk of future physical loss or damage, not merely actual physical loss or damage that occurs within the policy period. That argument, which the motion judge seems to have accepted, is at odds with the [policy] language ... The reference in that language to “all risks” being covered does not change that conclusion, because in this context the reference signifies that the policy was intended to cover property damage whatever its cause (subject to exclusion).[4]

The Appeals Court is not alone in suggesting that “all risks” language does not dispense with the requirement that an insured establish “direct physical loss or damage” within the policy period. Another court applying Massachusetts law concluded that “[i]t is impossible to read the [‘all risks’] insurance policy as providing coverage for ‘risk’ in the absence of a ‘damage.”’[5] Together, Hood and Tocci demonstrate that so-called “all risk” policies do not cover mere unrealized “risks in the air.” Instead, they cover actual, physical damage that comes to fruition during the policy period.

Hood is a significant decision for a number of reasons, including its observations with respect to what constitutes physical loss or damage in the food and beverage context. Given the paucity of case law addressing fundamental coverage issues in the context of claimed food and beverage product losses, it is likely that Hood’s impact will be felt in jurisdictions across the country.

DISCLAIMER: Heres represented Allianz Global Risks U.S. Insurance Co. in Hood LLP v. Allianz Global.

[1] Wisconsin Pharmacal Co. LLC v. Nebraska Cultures of California Inc., Nos. 2013AP613, 2013AP687, (Wis. Mar. 1, 2016).

[2] Silgan Containers LLC v. National Union Fire Insurance Co. of Pittsburgh, P.A., No. C 09-5971 RS, (N.D. Cal. Oct. 3, 2011), reversed and remanded on other grounds, 543 Fed. Appx. 635 (9th Cir. Oct. 22, 2013).

[3] 39 N.E.3d 769 (Mass. App. Ct. 2015).

[4] Hood, 39 N.E.3d at 772 n.2.

[5] Tocci Bldg. Corp. v. Zurich Am. Ins. Co., 659 F. Supp. 2d 251, 259 (D. Mass. 2009).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Zelle LLP | Attorney Advertising

Written by:

Zelle  LLP
Contact
more
less

Zelle LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.