Contaminated Food Scares Raise Myriad Insurance Issues

More recently, in February 2007, an outbreak of salmonella poisoning linked to peanut butter was reported to have occurred in 39 states since August 2006. FDA Release #P07-21, Feb. 14, 2007. Approximately 300 people have taken ill, batches of Peter Pan and Great Value peanut butter have been removed from sale, and refunds have been offered to consumers. Id. No indication has been given to date concerning the source of the contamination.

In addition, a review of the FDA Web site reveals that, while not receiving the national press of the above incidents, other instances of contaminated food occur with some frequency.

With the wide-ranging consequences arising from these events, impacted companies will undoubtedly seek insurance coverage for judgments or settlements of lawsuits, litigation costs, product recall expenses, business interruption or slow down, destruction of stock, and a variety of incidental expenses such as public relations costs and incentives to bring back customers. While certain affected entities may have insurance specifically designed to cover product recalls and contaminated products, many others will not. The latter category of companies might then try to obtain insurance under their general liability or first-party property policies.

Specialty Insurance

Some of the impacted companies, such as large growers or suppliers, may have insurance to respond to losses resulting from tainted food. One such insurance product is product recall insurance, which may include business interruption coverage for recalls and coverage for the cost of replacement of product and related incidental costs. This insurance has been offered for at least 20 years, and the Insurance Services Office ('ISO') recently issued a form policy for this insurance. Another insurance product is product contamination insurance, which is designed to cover financial losses arising from tainted products. Whether these policies will cover the variety of losses arising from contaminated food will turn on their specific terms, which often may be manuscripted. In addition, the law concerning the interpretation and application of these specialty policies is undeveloped.

However, many of the companies impacted by the contaminated food incidents may not have purchased such insurance, either because it was too expensive or, as in the case of companies downstream from the large growers and suppliers, the risks from contaminated food were perceived as relatively remote. See Business Insurance, Sept. 25, 2006. Such companies may then look to other forms of insurance.

General Liability Insurance

General liability insurance is insurance for third-party liabilities, designed to cover 'sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies.' The 'bodily injury' or 'property damage' must be caused by an 'occurrence' that takes place within the 'coverage territory.' General liability insurance typically also provides coverage for the cost to defend the insured against suits seeking such damages, and others place an affirmative duty to defend on the insurer.

With regard to bodily injury claims, suits involving sickness and death from contaminated food typically fall within the definition of 'bodily injury.' A more difficult question arises of whether claims for emotional distress or fear of injury constitute 'bodily injury.' Many jurisdictions interpret liability policies to require some physical injury or physical manifestation for coverage, while a handful of jurisdictions allow coverage for emotional distress or fear of injury without physical manifestations.

If a policyholder can establish bodily injury and other requirements for coverage, then certain exclusions may bar coverage. One such exclusion is the pollution exclusion, which generally bars coverage for 'bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants,' subject to certain additional requirements concerning location and nature of the release. 'Pollutants' generally are defined to include 'any solid, liquid, gaseous or thermal irritant or contaminant, including … waste.' To the extent it is alleged or established that bacterial contamination in the recent incidents arose from the release of animal waste, as has been suspected with the spinach and lettuce incidents, then such waste may meet the definition of 'pollutants.' Likewise, the E. coli itself may constitute a 'pollutant.'

Several relevant issues have arisen in case law concerning the scope of the pollution exclusion. Certain courts have held that the pollution exclusion is limited to the release of industrial-type pollution into the environment, such that application of a fertilizer to spinach or lettuce crops may or may not trigger the pollution exclusion. For example, West American Ins. Co. v. Tufco Flooring East, Inc., 104 N.C. App. 312, 409 S.E.2d 692 (1991), involved the question of whether a pollution exclusion barred coverage for the destruction of chickens at a Perdue plant that obtained an off-smell and taste from application of a floor coating adjacent to a refrigeration unit. The court held that the pollution exclusion is limited to discharges into the environment and not where, as here, the contaminant was used in a closed area. Other courts have rejected such a limitation as contrary to the terms of the exclusion. See, e.g., Zell v. Aetna Cas. & Sur. Co., 114 Ohio App. 3d 677, 683 N.E.2d 1154 (8 Dist. 1996) (rejecting Tufco). If a court were to follow the Tufco line of reasoning, the question remains as to whether fertilizing or watering of vegetables constitutes a release into the environment.

Another issue is what is the relevant 'discharge, dispersal, seepage, migration, release or escape' in the context of the pollution exclusion. The 'discharge, etc.' might be irrigation with contaminated water or the spreading of fertilizer, or it might be the ingestion of contaminated food. In the latter context, for example, courts are split as to whether ingestion of lead-containing paint chips constitutes a 'release' of 'pollutants.' Compare Lititz Mut. Ins. Co. v. Steely, 567 Pa. 98, 785 A.2d 975 (2001), with Peace v. Northwestern National Ins. Co., 228 Wis. 2d 106, 596 N.W.2d 429 (1999).

In the property damage context, general liability policies generally do not provide coverage for damage solely to an insured's product. See Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 93 Cal. Rptr. 2d 364 (1st Dist. 2000) (citing cases holding that diminution in value of a product by reason of a defective part or faulty workmanship does not constitute property damage). Such coverage may be available under first-party property insurance. Similarly, general liability coverage is not designed to cover recall expenses. Again, other insurance may be available for such expenses.

On the other hand, general liability coverage may respond if a policyholder's product is incorporated into, and damages, a third-party's product. See Shade Foods, cited above (potential coverage for almonds containing wood slivers that were incorporated into nut clusters and cereal). In the contaminated spinach situation, examples may be bagged salad mix or frozen pizza.

Two recent cases have addressed such a situation. In Zurich American Ins. Co. v. Cutrale Citrus Juices USA, Inc., 2002 WL 1433728 (M.D. Fla. Feb. 11, 2002), trace amounts of food-grade propylene glycol leaked into a batch of a producer's orange juice, which was linked to leakage of coolant through a cracked pipe. This juice was sold to a distributor, which incorporated it into a larger batch of juice. All of the juice either had to be destroyed or reconstituted. The insurer raised three coverage issues: 1) whether the claim for breach of contract in failing to supply pure juice was an 'occurrence,' 2) whether 'property damage' arose from the fact that the adulterated juice remained fit for human consumption, and 3) whether an exclusion for property damage that has not been physically injured arising out of a defect, deficiency or inadequacy in 'your work' barred coverage. The court found a covered occurrence and property damage, and held that the exclusion was inapplicable, such that coverage was potentially available for this incident.

In Chubb Ins. Co. of NJ v. Hartford Fire Ins. Co., 1999 WL 760206 (S.D.N.Y. Sept. 27, 1999), the policyholders contracted to provide Coca-Cola and Tree Top with pure juice concentrate for incorporation into products advertised as '100% pure juice.' After incorporation, the juice was determined to contain a sweetener named 'fructuline,' such that Coca-Cola and Tree Top could not sell their products as labeled. Addressing the question of whether this incident was a covered occurrence, the court held that 'where the insured unintentionally sells a product that is allegedly defective and that product is incorporated into a third-party's finished product, the resulting impairment to the finished product is an 'occurrence.”

A threshold issue is whether there is actual 'property damage' if actual contamination of food is not established for a specific lot or batch. General liability policies typically define 'property damage' to include both 'physical injury to tangible property' and 'loss of use of tangible property that is not physically injured.' Issues may arise as to whether mitigation or preventative measures constitute 'loss of use.' Specific policy language should also be reviewed to determine whether this, or a more limited, definition applies.

Moreover, whether or not a policyholder's product physically injures other property may affect application of the impaired property exclusion of many policies. 'Impaired property' is typically defined to include 'tangible property, other than 'your product' … that cannot be used or is less useful because … it incorporates 'your product' … that is known or thought to be defective, deficient, inadequate or dangerous.' 'Impaired property' is often excluded from coverage if it has not been physically injured and arises out of a defect, deficiency, inadequacy or dangerous condition of the policyholder's product. However, coverage may be available if the 'impaired product' is physically injured. See Zurich v. Cutrale, discussed above.

In light of the distinction between 'impaired property' that is or is not physically injured, consideration of the impaired property exclusion may also raise issues of proof for products that have been destroyed.

As noted above, general liability policies typically do not cover recall expenses, both for the policyholder's product and for 'impaired property.' This is accomplished through an exclusion for 'damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of 'your product' … or 'impaired property' if such product … or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.' This language would appear to preclude coverage for the full gamut of recall expenses, including expenses to prevent or mitigate further damage.

Other exclusions applicable to products may bar coverage for adulterated products and the costs of testing for adulteration. Two cases illustrate how these exclusions may be applied.

Grain Dealers Mut. Ins. Co. v. Portia Grain Co., 699 F. Supp. 1380 (E.D. Ark. 1988), arose from the contamination of chicken feed with the pesticide chlordane. Numerous flocks of the food processor's chickens had to be destroyed as a result of the insured grain supplier's sale of the contaminated feed. The grain supplier sought coverage for amounts owed to the food processor under a general liability policy, which contained an exclusion for 'bodily injury' or 'property damage' included within the 'products hazard.' The policy defined 'products hazard' as 'property damage arising out of the named insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the … property damage occurs away from the premises owned by or rented to the named insured and after physical possession of such products has been relinquished to others.' Under the facts of the case, the court held that that no ambiguity existed in the exclusion and that the exclusion barred coverage.

In contrast to the straightforward analysis in Portia Grain, the Eight Circuit undertook a complex analysis of a products exclusion in L.D. Schreiber v. Standard Milk Co., 457 F.2d 962 (8th Cir. 1972). Schreiber involved the question of products liability coverage for a cheese producer that supplied cheese contaminated by staph bacteria to a wholesaler and retailer. The specific question at issue was whether the insurance policy covered the cost incurred by the wholesaler to test its entire supply of cheese, of which it determined that only a small portion (3%) was contaminated. The policy contained an exclusion for 'injury to or destruction of … any goods [or] products … manufactured, sold, handled or distributed … by the named insured … out of which the accident arises.' The lower court found this exclusion to be applicable, but the appellate court reversed and found coverage. The appellate court reasoned that because the contaminated cheese was not physically incorporated into other non-contaminated cheese, the entire amount of cheese that was tested should not be considered a single unit for purposes of this exclusion. In other words, the exclusion applied only to the 3% of the cheese that was determined to be contaminated, and not the other 97% that was untainted. Accordingly, coverage for the testing costs to verify that the larger portion of cheese was untainted was not barred by the exclusion. As this case demonstrates, coverage may turn on unique and complex facts in a given circumstance.

Given the reach of the recent contaminated food incidents, potential targets for liability and their insurers may reach a broad range of businesses, beginning with growers and fertilizer manufacturers, continuing through packagers, distributors, and shippers, and ending through points of sale entities, such as food processors, retail markets, and restaurants. General liability policies often provide coverage for entities beyond the named insured. For example, policies also often contain 'vendors' endorsements,' which provide coverage for the distributors of the named insured's product, and they sometimes provide coverage for any entity for which the named insured is contractually obligated to procure insurance for liabilities arising from a transaction or relationship. Businesses and their insurers facing liability should evaluate whether entities other than the named insured may be covered under their policies, as well as whether the policyholders are potentially covered under other policies. To the extent that multiple policies may respond to a claim, issues may arise concerning priority of coverage and allocation. Business and insurers should also evaluate potential subrogation and contribution claims and whether the policyholder has taken appropriate measures to protect the insurers' subrogation and contribution rights.

Property Insurance

First-party property insurance generally has two components ' coverage for direct physical loss or damage of the policyholder's property and coverage for business interruption caused by or resulting from a covered cause of loss. Certain property policies are 'all risks' policies, which cover loss for all risks unless excluded. Other policies define and limit coverage to specified causes of loss. The policy language will be determinative of whether food contamination is a covered cause of loss. Moreover, coverage questions may arise if the property loss or the business interruption is not the result of actually contaminated food. In addition, issues may arise regarding whether the purposeful destruction of a product that may not be damaged constitutes a covered cause of loss.

Two cases demonstrate how contaminated food cases may be treated in the first-party insurance context. Allianz Ins. Co. v. RJR Nabisco Holdings Corp., 96 F. Supp. 2d 253 (S.D.N.Y. 2000), involved customer claims of a chemical odor and flavor in various Nabisco products that were traced to trimethyl benzene that was used at certain warehouse facilities that, while posing no health risk, caused an unpleasant odor and flavor in food products. Nabisco sought coverage for the destruction of more than a million cases of food under a first-party 'all risks' insurance policy. The policy contained an exclusion for 'loss or damage caused by or resulting from contamination unless such loss or damage results from a peril not otherwise excluded.' In finding coverage, the court reasoned in roundabout fashion that 'the only reasonable reading of this language is that contamination losses resulting from perils otherwise covered by the policy are likewise covered and contamination losses resulted from perils expressly excluded by the policy are likewise excluded,' effectively rendering contamination irrelevant application of the exclusion. The court concluded that because the contamination resulted from faulty construction of the warehouse, which is typically covered by an 'all risks' policy, the contamination would likewise be covered.

Pillsbury Co. v. Underwriters at Lloyd's, London, 705 F. Supp. 1396 (D. Minn. 1989), addressed the question of coverage under an 'all-risks' policy for destruction of cans of creamed corn due to the possibility of underprocessing arising from a defect in the canning process. The product was not necessarily contaminated, but the purpose of the processing was to prevent spoilage. Coverage questions arose as to whether the loss was fortuitous or was the result of decision-making in the processing of the corn, and whether the loss arose from an 'inherent vice' or 'faulty workmanship' of the product and was, therefore, excluded. The court found the loss to be fortuitous and the exclusions inapplicable, so that the cost of destruction was covered.

Many commercial property policies provide contingent business interruption ('CBI') coverage for the interruption of business as a direct result of physical damage to property not owned or operated by the insured that prevents: 1) any supplier of goods and services to the insured from rendering its goods and services or 2) any direct receiver of goods and services from the insured from accepting such goods and services. In the context of the spinach incident, many buyers and users of spinach, such as food processors (e.g., preparers of pre-packaged salad mixes, frozen, and canned foods) and restaurants may submit claims arising from lost sales due to the temporary unavailability of spinach. A threshold question may exist as to whether such losses are the direct result of physical damage to property. Complex issues of valuation may also arise in determining the amount of lost sales.

Conclusion

A broad range of insurance coverage issues arise in the contaminated food context. The foregoing provides a sampling of potential issues in light of reports to date. The question of coverage will turn on the particular facts of the loss, the controlling policy language, and applicable law.

Dale E. Hausman is a partner at Wiley Rein LLP in Washington, DC, and has more than 15 years' experience counseling and representing large property and casualty insurers in complex first and thirty-party insurance disputes nationwide. In particular, he has advised and represented insurers in numerous products liability claims, including contaminated food claims. Michael Gridley, an associate at the firm, also contributed to this article.

Three instances of contaminated food with potentially wide-ranging impacts have received national media attention in the past six months.

In September 2006, the U.S. Food and Drug Administration ('FDA') issued an alert regarding an outbreak of spinach contaminated by E. coli bacteria (FDA Release #P06-131, Sept. 14, 2006). The FDA reported that, as of Sept. 26, 2006, 183 cases of illness in 26 states due to E. coli infection were reported to the Centers for Disease Control and Prevention ('CDC'), with 95 hospitalizations and one death. Five lawsuits reportedly were filed by one law firm in Washington state. Food suppliers in Oregon, Washington, California, and New Jersey undertook five recalls, impacting sales in numerous states and, in some instances, internationally. These recalls not only affected packaged spinach, but also processed food such as salad mixes and frozen pizza. FDA Release #P06-146, Sept. 26, 2006.

In December 2006, a second outbreak of E. coli contaminated food arose at Taco Bell restaurants in the Northeast. National Public Radio reported that three-dozen people in New Jersey, New York, and Pennsylvania were sickened and nine were hospitalized. National Public Radio, All Things Considered, 'E. Coli Forces Taco Bell to Pull Green Onions,' (Dec. 6, 2006). Taco Bell originally suspected that the source of the E. coli contamination was green onions, and it removed green onions from 5800 restaurants around the country. Taco Bell also closed many of its stores in the region. Id. After Taco Bell destroyed the green onions, it was subsequently determined that the source of the E. coli contamination was lettuce. FDA Release #P06-201, Dec. 14, 2006.

More recently, in February 2007, an outbreak of salmonella poisoning linked to peanut butter was reported to have occurred in 39 states since August 2006. FDA Release #P07-21, Feb. 14, 2007. Approximately 300 people have taken ill, batches of Peter Pan and Great Value peanut butter have been removed from sale, and refunds have been offered to consumers. Id. No indication has been given to date concerning the source of the contamination.

In addition, a review of the FDA Web site reveals that, while not receiving the national press of the above incidents, other instances of contaminated food occur with some frequency.

With the wide-ranging consequences arising from these events, impacted companies will undoubtedly seek insurance coverage for judgments or settlements of lawsuits, litigation costs, product recall expenses, business interruption or slow down, destruction of stock, and a variety of incidental expenses such as public relations costs and incentives to bring back customers. While certain affected entities may have insurance specifically designed to cover product recalls and contaminated products, many others will not. The latter category of companies might then try to obtain insurance under their general liability or first-party property policies.

Specialty Insurance

Some of the impacted companies, such as large growers or suppliers, may have insurance to respond to losses resulting from tainted food. One such insurance product is product recall insurance, which may include business interruption coverage for recalls and coverage for the cost of replacement of product and related incidental costs. This insurance has been offered for at least 20 years, and the Insurance Services Office ('ISO') recently issued a form policy for this insurance. Another insurance product is product contamination insurance, which is designed to cover financial losses arising from tainted products. Whether these policies will cover the variety of losses arising from contaminated food will turn on their specific terms, which often may be manuscripted. In addition, the law concerning the interpretation and application of these specialty policies is undeveloped.

However, many of the companies impacted by the contaminated food incidents may not have purchased such insurance, either because it was too expensive or, as in the case of companies downstream from the large growers and suppliers, the risks from contaminated food were perceived as relatively remote. See Business Insurance, Sept. 25, 2006. Such companies may then look to other forms of insurance.

General Liability Insurance

General liability insurance is insurance for third-party liabilities, designed to cover 'sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies.' The 'bodily injury' or 'property damage' must be caused by an 'occurrence' that takes place within the 'coverage territory.' General liability insurance typically also provides coverage for the cost to defend the insured against suits seeking such damages, and others place an affirmative duty to defend on the insurer.

With regard to bodily injury claims, suits involving sickness and death from contaminated food typically fall within the definition of 'bodily injury.' A more difficult question arises of whether claims for emotional distress or fear of injury constitute 'bodily injury.' Many jurisdictions interpret liability policies to require some physical injury or physical manifestation for coverage, while a handful of jurisdictions allow coverage for emotional distress or fear of injury without physical manifestations.

If a policyholder can establish bodily injury and other requirements for coverage, then certain exclusions may bar coverage. One such exclusion is the pollution exclusion, which generally bars coverage for 'bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants,' subject to certain additional requirements concerning location and nature of the release. 'Pollutants' generally are defined to include 'any solid, liquid, gaseous or thermal irritant or contaminant, including … waste.' To the extent it is alleged or established that bacterial contamination in the recent incidents arose from the release of animal waste, as has been suspected with the spinach and lettuce incidents, then such waste may meet the definition of 'pollutants.' Likewise, the E. coli itself may constitute a 'pollutant.'

Several relevant issues have arisen in case law concerning the scope of the pollution exclusion. Certain courts have held that the pollution exclusion is limited to the release of industrial-type pollution into the environment, such that application of a fertilizer to spinach or lettuce crops may or may not trigger the pollution exclusion. For example, West American Ins. Co. v. Tufco Flooring East, Inc. , 104 N.C. App. 312, 409 S.E.2d 692 (1991), involved the question of whether a pollution exclusion barred coverage for the destruction of chickens at a Perdue plant that obtained an off-smell and taste from application of a floor coating adjacent to a refrigeration unit. The court held that the pollution exclusion is limited to discharges into the environment and not where, as here, the contaminant was used in a closed area. Other courts have rejected such a limitation as contrary to the terms of the exclusion. See, e.g., Zell v. Aetna Cas. & Sur. Co. , 114 Ohio App. 3d 677, 683 N.E.2d 1154 (8 Dist. 1996) (rejecting Tufco ). If a court were to follow the Tufco line of reasoning, the question remains as to whether fertilizing or watering of vegetables constitutes a release into the environment.

Another issue is what is the relevant 'discharge, dispersal, seepage, migration, release or escape' in the context of the pollution exclusion. The 'discharge, etc.' might be irrigation with contaminated water or the spreading of fertilizer, or it might be the ingestion of contaminated food. In the latter context, for example, courts are split as to whether ingestion of lead-containing paint chips constitutes a 'release' of 'pollutants.' Compare Lititz Mut. Ins. Co. v. Steely , 567 Pa. 98, 785 A.2d 975 (2001), with Peace v. Northwestern National Ins. Co. , 228 Wis. 2d 106, 596 N.W.2d 429 (1999).

In the property damage context, general liability policies generally do not provide coverage for damage solely to an insured's product. See Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 93 Cal. Rptr. 2d 364 (1st Dist. 2000) (citing cases holding that diminution in value of a product by reason of a defective part or faulty workmanship does not constitute property damage). Such coverage may be available under first-party property insurance. Similarly, general liability coverage is not designed to cover recall expenses. Again, other insurance may be available for such expenses.

On the other hand, general liability coverage may respond if a policyholder's product is incorporated into, and damages, a third-party's product. See Shade Foods, cited above (potential coverage for almonds containing wood slivers that were incorporated into nut clusters and cereal). In the contaminated spinach situation, examples may be bagged salad mix or frozen pizza.

Two recent cases have addressed such a situation. In Zurich American Ins. Co. v. Cutrale Citrus Juices USA, Inc., 2002 WL 1433728 (M.D. Fla. Feb. 11, 2002), trace amounts of food-grade propylene glycol leaked into a batch of a producer's orange juice, which was linked to leakage of coolant through a cracked pipe. This juice was sold to a distributor, which incorporated it into a larger batch of juice. All of the juice either had to be destroyed or reconstituted. The insurer raised three coverage issues: 1) whether the claim for breach of contract in failing to supply pure juice was an 'occurrence,' 2) whether 'property damage' arose from the fact that the adulterated juice remained fit for human consumption, and 3) whether an exclusion for property damage that has not been physically injured arising out of a defect, deficiency or inadequacy in 'your work' barred coverage. The court found a covered occurrence and property damage, and held that the exclusion was inapplicable, such that coverage was potentially available for this incident.

In Chubb Ins. Co. of NJ v. Hartford Fire Ins. Co., 1999 WL 760206 (S.D.N.Y. Sept. 27, 1999), the policyholders contracted to provide Coca-Cola and Tree Top with pure juice concentrate for incorporation into products advertised as '100% pure juice.' After incorporation, the juice was determined to contain a sweetener named 'fructuline,' such that Coca-Cola and Tree Top could not sell their products as labeled. Addressing the question of whether this incident was a covered occurrence, the court held that 'where the insured unintentionally sells a product that is allegedly defective and that product is incorporated into a third-party's finished product, the resulting impairment to the finished product is an 'occurrence.”

A threshold issue is whether there is actual 'property damage' if actual contamination of food is not established for a specific lot or batch. General liability policies typically define 'property damage' to include both 'physical injury to tangible property' and 'loss of use of tangible property that is not physically injured.' Issues may arise as to whether mitigation or preventative measures constitute 'loss of use.' Specific policy language should also be reviewed to determine whether this, or a more limited, definition applies.

Moreover, whether or not a policyholder's product physically injures other property may affect application of the impaired property exclusion of many policies. 'Impaired property' is typically defined to include 'tangible property, other than 'your product' … that cannot be used or is less useful because … it incorporates 'your product' … that is known or thought to be defective, deficient, inadequate or dangerous.' 'Impaired property' is often excluded from coverage if it has not been physically injured and arises out of a defect, deficiency, inadequacy or dangerous condition of the policyholder's product. However, coverage may be available if the 'impaired product' is physically injured. See Zurich v. Cutrale, discussed above.

In light of the distinction between 'impaired property' that is or is not physically injured, consideration of the impaired property exclusion may also raise issues of proof for products that have been destroyed.

As noted above, general liability policies typically do not cover recall expenses, both for the policyholder's product and for 'impaired property.' This is accomplished through an exclusion for 'damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of 'your product' … or 'impaired property' if such product … or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.' This language would appear to preclude coverage for the full gamut of recall expenses, including expenses to prevent or mitigate further damage.

Other exclusions applicable to products may bar coverage for adulterated products and the costs of testing for adulteration. Two cases illustrate how these exclusions may be applied.

Grain Dealers Mut. Ins. Co. v. Portia Grain Co. , 699 F. Supp. 1380 (E.D. Ark. 1988), arose from the contamination of chicken feed with the pesticide chlordane. Numerous flocks of the food processor's chickens had to be destroyed as a result of the insured grain supplier's sale of the contaminated feed. The grain supplier sought coverage for amounts owed to the food processor under a general liability policy, which contained an exclusion for 'bodily injury' or 'property damage' included within the 'products hazard.' The policy defined 'products hazard' as 'property damage arising out of the named insured's products or reliance upon a representation or warranty made at any time with respect thereto, but only if the … property damage occurs away from the premises owned by or rented to the named insured and after physical possession of such products has been relinquished to others.' Under the facts of the case, the court held that that no ambiguity existed in the exclusion and that the exclusion barred coverage.

In contrast to the straightforward analysis in Portia Grain , the Eight Circuit undertook a complex analysis of a products exclusion in L.D. Schreiber v. Standard Milk Co. , 457 F.2d 962 (8th Cir. 1972). Schreiber involved the question of products liability coverage for a cheese producer that supplied cheese contaminated by staph bacteria to a wholesaler and retailer. The specific question at issue was whether the insurance policy covered the cost incurred by the wholesaler to test its entire supply of cheese, of which it determined that only a small portion (3%) was contaminated. The policy contained an exclusion for 'injury to or destruction of … any goods [or] products … manufactured, sold, handled or distributed … by the named insured … out of which the accident arises.' The lower court found this exclusion to be applicable, but the appellate court reversed and found coverage. The appellate court reasoned that because the contaminated cheese was not physically incorporated into other non-contaminated cheese, the entire amount of cheese that was tested should not be considered a single unit for purposes of this exclusion. In other words, the exclusion applied only to the 3% of the cheese that was determined to be contaminated, and not the other 97% that was untainted. Accordingly, coverage for the testing costs to verify that the larger portion of cheese was untainted was not barred by the exclusion. As this case demonstrates, coverage may turn on unique and complex facts in a given circumstance.

Given the reach of the recent contaminated food incidents, potential targets for liability and their insurers may reach a broad range of businesses, beginning with growers and fertilizer manufacturers, continuing through packagers, distributors, and shippers, and ending through points of sale entities, such as food processors, retail markets, and restaurants. General liability policies often provide coverage for entities beyond the named insured. For example, policies also often contain 'vendors' endorsements,' which provide coverage for the distributors of the named insured's product, and they sometimes provide coverage for any entity for which the named insured is contractually obligated to procure insurance for liabilities arising from a transaction or relationship. Businesses and their insurers facing liability should evaluate whether entities other than the named insured may be covered under their policies, as well as whether the policyholders are potentially covered under other policies. To the extent that multiple policies may respond to a claim, issues may arise concerning priority of coverage and allocation. Business and insurers should also evaluate potential subrogation and contribution claims and whether the policyholder has taken appropriate measures to protect the insurers' subrogation and contribution rights.

Property Insurance

First-party property insurance generally has two components ' coverage for direct physical loss or damage of the policyholder's property and coverage for business interruption caused by or resulting from a covered cause of loss. Certain property policies are 'all risks' policies, which cover loss for all risks unless excluded. Other policies define and limit coverage to specified causes of loss. The policy language will be determinative of whether food contamination is a covered cause of loss. Moreover, coverage questions may arise if the property loss or the business interruption is not the result of actually contaminated food. In addition, issues may arise regarding whether the purposeful destruction of a product that may not be damaged constitutes a covered cause of loss.

Two cases demonstrate how contaminated food cases may be treated in the first-party insurance context. Allianz Ins. Co. v. RJR Nabisco Holdings Corp. , 96 F. Supp. 2d 253 (S.D.N.Y. 2000), involved customer claims of a chemical odor and flavor in various Nabisco products that were traced to trimethyl benzene that was used at certain warehouse facilities that, while posing no health risk, caused an unpleasant odor and flavor in food products. Nabisco sought coverage for the destruction of more than a million cases of food under a first-party 'all risks' insurance policy. The policy contained an exclusion for 'loss or damage caused by or resulting from contamination unless such loss or damage results from a peril not otherwise excluded.' In finding coverage, the court reasoned in roundabout fashion that 'the only reasonable reading of this language is that contamination losses resulting from perils otherwise covered by the policy are likewise covered and contamination losses resulted from perils expressly excluded by the policy are likewise excluded,' effectively rendering contamination irrelevant application of the exclusion. The court concluded that because the contamination resulted from faulty construction of the warehouse, which is typically covered by an 'all risks' policy, the contamination would likewise be covered.

Pillsbury Co. v. Underwriters at Lloyd's, London , 705 F. Supp. 1396 (D. Minn. 1989), addressed the question of coverage under an 'all-risks' policy for destruction of cans of creamed corn due to the possibility of underprocessing arising from a defect in the canning process. The product was not necessarily contaminated, but the purpose of the processing was to prevent spoilage. Coverage questions arose as to whether the loss was fortuitous or was the result of decision-making in the processing of the corn, and whether the loss arose from an 'inherent vice' or 'faulty workmanship' of the product and was, therefore, excluded. The court found the loss to be fortuitous and the exclusions inapplicable, so that the cost of destruction was covered.

Many commercial property policies provide contingent business interruption ('CBI') coverage for the interruption of business as a direct result of physical damage to property not owned or operated by the insured that prevents: 1) any supplier of goods and services to the insured from rendering its goods and services or 2) any direct receiver of goods and services from the insured from accepting such goods and services. In the context of the spinach incident, many buyers and users of spinach, such as food processors (e.g., preparers of pre-packaged salad mixes, frozen, and canned foods) and restaurants may submit claims arising from lost sales due to the temporary unavailability of spinach. A threshold question may exist as to whether such losses are the direct result of physical damage to property. Complex issues of valuation may also arise in determining the amount of lost sales.

Conclusion

A broad range of insurance coverage issues arise in the contaminated food context. The foregoing provides a sampling of potential issues in light of reports to date. The question of coverage will turn on the particular facts of the loss, the controlling policy language, and applicable law.

Dale E. Hausman is a partner at Wiley Rein LLP in Washington, DC, and has more than 15 years' experience counseling and representing large property and casualty insurers in complex first and thirty-party insurance disputes nationwide. In particular, he has advised and represented insurers in numerous products liability claims, including contaminated food claims. Michael Gridley, an associate at the firm, also contributed to this article.