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. There
was no evidence that MSI intended to
injure MOM. Therefore, the court found
that the recall of the instant milk was an
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, were 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 because it included instant milk that was
manufactured in unsanitary conditions,
there was property damage. The court
also found that the inability to lawfully
distribute products because of FDA regulations was an impairment of function
and value sufficient to support a finding
of physical damage. So, property damage
was present in this case.
Netherlands argued that several exclusions applied, such as the recall exclusion.
Netherlands said that MSI sought coverage for recall of the instant milk, not the
oatmeal. MSI responded that it sought indemnity for damages from MOM's recall
of the oatmeal.
The court 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 al-
though lost profits or other consequential
damages do not constitute property dam-
age, 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 dam-
age, and the policy applied.
Some companies have the forethought
to purchase specialized coverage for
product recall losses but can still run
into difficulties. Such was the case in H.J.
Heinz Co. v. Starr Surplus Lines Ins. Co.,
[15cv0631, 2016 WL 374307 (W.D. Penn.
Feb. 1, 2016)].
Starr sold Heinz an Accidental Contamination and Government Recall insurance policy, and in August 2014, Heinz
submitted a claim for losses incurred due
to a product recall in China. Starr moved
to rescind the policy because it discovered Heinz had not disclosed certain
losses during the application process.
For example, Heinz conducted a silent
recall after the Chinese Government de-
tected higher-than-allowed nitrate lev-
els in some of Heinz's baby cereal prod-
ucts, which resulted in the destruction of
245,000 pounds of product at a loss of $11
to 12 million. Heinz contended that the
loss was intentionally not disclosed be-
cause the broker believed it would not be
covered by a contaminated products pol-
icy. The application, though, specifically
asked for any withdrawals, recalls or stock
recoveries, whether insurable or not.
Other large and small losses were also
not identified on the application.
The court stated, "Starr has adequately
demonstrated that Heinz made material
that this Court finds were intentional,"
and granted rescission of the policy.
Product recall losses can have a devastating effect on companies. Knowing what
is insurable and what coverages are available for such losses—and correctly applying for those coverages—can make a huge
difference in how a company recovers.
Susan Massmann, CPCU, (smassmann@
alm.com) is managing editor of electronic
publications for the reference division of ALM,
the parent company of Treasury & Risk.
The court found that
damages for a food recall
claim were covered by
the liability policy.
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