“Policy” Arguments and Insurance Coverage for Food Contamination Liability Losses

August 15, 2012
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Claims against a food ingredient manufacturer or supplier can result after contaminated ingredients are sold.  They can be mixed with other ingredients, rendering the final product useless.  Various types of liability insurance policies may cover such losses. Yet insurance carriers may deny coverage for some or all of the liability incurred as a result of usage of the ingredient product.  They may cite an exclusion limiting recovery for damage to a manufacturer’s or supplier’s unused ingredient product. Fortunately for manufacturers and suppliers, courts mainly reject complete denials.  For example, a court found coverage for liability incurred when benzene-contaminated carbon dioxide was inadvertently used in beverages (Nat’l Union Fire Ins. Co. v. Terra Indus., Inc., 346 F.3d 1160 (8th Cir. 2003)).  The court rejected the position that the claim was essentially excluded because the low levels of benzene contamination did not require withdrawal of the bottled product. In addition to gas and liquid ingredients, carriers may argue that the policyholders’ solid food ingredients are technically separable from any contaminating substances.  In a California case, for example, the carrier unsuccessfully argued that wood splinters in cereal nut clusters could be separated and removed (Shade Foods Inc. v. Innovative Prods. Sales & Mtg. Inc., 93 Cal. Rptr. 2d 364 (Ct. App. 2000)).   The court described the carrier’s point as “fanciful.” In denying coverage, carriers often try to make vague “public policy”-oriented arguments.  They assert that individual coverage denials are beneficial to policyholders because they help keep rates down for the general insuring public.  In reality, insurance-oriented “policy” arguments favor coverage.  For example:
  • Through rates, the insurance industry spreads the risk of loss over many  actors;
  • Through insurance, policyholders are better able as a group to bear individual losses than are uninsured entities;
  • The law safeguards underlying defendants against unfairly large claims through foreseeability doctrines and damage limitations – and these benefit indemnifying insurers;
  • The insurance industry can limit coverage in other ways, such as by policy limits; and
  • Because the products at issue have already caused unintended injury or damage (coverage for intended injury or damage is excluded), the carrier is not reimbursing a mere warranty claim.
These powerful policy arguments favoring coverage may sound familiar.  Prominent industry spokesmen and insurance policy drafters have used them in writings and speeches for decades.  Yet they are rarely found in policyholder briefs — and therefore are not addressed in court decisions. In sum, though policyholders have often been successful in securing coverage for liability resulting from food contamination, they may also persuade courts by using the insurance industries’ own words. If you would like to discuss this topic or have any questions, please contact Charles Yuen, Chair, Insurance Recovery and Liability Group or Patrick J. McNamara, Partner and General Counsel toNational Association of Flavor & Food-Ingredient Systems (NAFFS).