W.D.N.Y.: Insurer Must Defend Claim Despite Its Being Pleaded Under a Contract Theory

Thruway had a contract to provide apples to Milnot Holding Company, a baby-food manufacturer whose brands include Beech-Nut. The contract required that the apples be free of Brodifacoum and Bromadiolone, two rodenticides. Milnot subsequently discovered in March 2006 that Thruway had delivered apples contaminated with rodenticide; the contamination occurred during a period when the apples were stored at facilities Thruway did not operate. Milnot used these apples to make its baby food. After discovering the rodenticide, Milnot recalled the affected baby food. Milnot then sued Thruway, alleging that the latter had breached its supply contract, including express and implied warranties, and sought damages of more than $1.5 million. In 2014, Milnot secured partial summary judgment establishing Thruway's liability on the contract claims.

Thruway had two policies from Massachusetts Bay: a primary-level CGL policy and an excess/umbrella policy. Thruway provided notice to Massachusetts Bay in March 2006 and collected $50,000 payable under a product recall endorsement to the primary-level CGL policy, by July 2006. When Milnot filed suit against Thruway, however, Massachusetts Bay apparently did not provide a defense to Thruway, and, in 2011, Thruway brought its declaratory judgment action against Massachusetts Bay.

The Court's Decision

The parties filed competing summary judgment motions that turned on the court's evaluation of whether there had been an “occurrence” and the application of the business risk exclusions. Massachusetts Bay argued that it could have no duty to defend or indemnify Thruway because damage to Thruway's own work or product would not be an “occurrence”; Massachusetts Bay contended that the underlying claim alleged breach of the contract to sell unadulterated apples and, under CGL policies, a failure to perform a contract cannot be construed as an “occurrence” and, as such, the policies' coverage provisions were not triggered”). Massachusetts Bay pointed to a line of New York cases” holding that 'the purpose of a commercial general liability policy … is to provide coverage for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product … is not what the damaged [party] bargained for.”

The court rejected the insurer's arguments, first considering that the policies defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court referred to the U.S. Court of Appeals for the Second Circuit decision, Aetna Casualty & Surety Co. v. General Time Corp., 704 F.2d 80, 82 (2d Cir. 1983), which construes the term” accident” from the insured's standpoint to conclude that an accident is “an unexpected, unfortunate occurrence … which was not done on purpose” (internal quotations omitted). Finding that Massachusetts Bay had introduced no evidence that Thruway knew the apples it sold to Milnot had been contaminated, the court concluded that the subsequent contamination of Milnot's baby food by the incorporation of contaminated apples was an “occurrence.”

Having thus found, the court turned to Massachusetts Bay's argument that there had been only (excluded) economic loss as a result of a breach of contract, not (potentially covered) property damage as a result of tort liability. Here, the court refused to read into the policy a categorical exclusion for claims where the underlying plaintiff alleges a contract-law theory of recovery. Instead, the court indicated that the important distinction for purposes of a commercial general liability policy is whether there is “actual physical damage to property other than the defective property of the insured.” Because Thruway's apples were adulterated, the court determined that they caused damage to other property ' Milnot's baby food ' when they were incorporated into that other property. The resulting damages that Milnot alleged it incurred in recalling and destroying the damaged product served as a measure of property damage, not economic loss.

Massachusetts Bay also argued that even if there were an occurrence involving liability arising out of property damage, it was excused from defending or indemnifying Thruway because of the business risk exclusions, the exclusions for “Recall of Products, Work or Impaired Property” and for” Damage to Your Product,” “Damage to Your Work” and “Damage to Impaired Property.” The court rejected the carrier's effort to rely on the recall exclusion to avoid its defense obligation because that exclusion acts to bar coverage for damages claimed for the withdrawal of the insured's products, work, or impaired property and here the court determined that the product being recalled was Milnot's baby food, not the adulterated apples that had been incorporated thereto. Id. at *12.

The court similarly rejected Massachusetts Bay's attempt to rely on exclusions for damage to “your work,” “your product” and “impaired property,” citing case law establishing that commercial general liability policies are “'clearly intended to cover the possibility that the insured's product, once sold, would cause … damage to property other than the product itself'” (quoting Hartog Rahal P'ship v. Am Motorists. Ins. Co., 359 F. Supp.2d 331, 333 (S.D.N.Y. 2005) (ellipsis in original)).

While the court was willing to grant summary judgment to Thruway with regard to the duty to defend, it was not yet willing to grant Thruway's requested declaration that Massachusetts Bay had an obligation to indemnify. The court found that request premature given that there had not yet been any resolution in the underlying matter of the amount of Milnot's damages and the basis therefore.

Having determined that there was a duty to defend and that any declaration concerning the duty to indemnify was premature, the court announced that it need not reach Thruway's argument that Massachusetts Bay was estopped to contest defense and indemnification coverage by apparently contrary prior conduct.

Implications

Thruway Produce, Inc. v. Massachusetts Bay Insurance Co. is a reminder of the importance of eschewing broad statements (e.g., CGL policies apply only to tort losses, not to breaches of contract) for analysis of how the particular policy language of the relevant insurance policies applies to the specific claim at issue. The court rejected the insurer's invitation to read into the CGL policies an exclusion based on the legal theories advanced in the underlying claim against the insured, an exclusion that would eliminate coverage for accidental and unintended property damage or bodily injury simply because the underlying plaintiff was pursuing recovery under a contract rather than tort theory.

Donald R. McMinn is a partner in the Washington, DC, firm of Hollingsworth LLP.