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May 2014Newsletter

Product Recall Exclusion Held Not to Bar Coverage for Recall of Tainted Milk

Agribusiness, Food and Beverage Newsletter

On March 18, 2014, the 8th Circuit Court of Appeals upheld a ruling by a Minnesota federal judge that Main Street Ingredients LLC (Main Street), a powdered milk supplier, was entitled to indemnification by its insurer, The Netherlands Co. (Netherlands), when Malt-O-Meal recalled instant oatmeal under the suspicion that it contained tainted milk supplied to it by Main Street. The ruling was an important victory for policyholders in the context of tainted food products and product recalls, and only emphasizes the need to analyze coverage issues in detail when disputes arise.

 

In 2007, Plainview Milk Products Cooperative (Plainview) sold powdered milk to Main Street, who in turn sold the powdered milk to Malt-O-Meal for use in Malt-O-Meal’s instant oatmeal cereal products. In 2009, the Food and Drug Administration found salmonella bacteria at Plainview’s plant. Plainview subsequently issued a voluntary recall of the powdered milk manufactured at its plant from 2007-2009. Malt-O-Meal received notice from Main Street that the powdered milk sold to it may contain salmonella, which caused Malt-O-Meal to issue a recall of its oatmeal cereal products.

 

In 2010, Malt-O-Meal sued Main Street and Plainview to recover damages incurred as a result of Malt-O-Meal having to recall its oatmeal cereal products. The Parties in that case eventually reached a settlement whereby Main Street agreed to pay $1.4 million to Malt-O-Meal for the loss of its products. While the case was still pending, however, Netherlands brought a coverage lawsuit against Main Street and Malt-O-Meal in federal court, asserting that it had no duty to defend or indemnify Main Street for the claims being made against it by Malt-O-Meal.

 

Netherlands argued in its coverage lawsuit that, among other things, there was no coverage under its policy because there was no “property damage” as that term is used in its policy. According to Netherlands, “property damage” required that there be physical injury to tangible property, and there was no such injury because Malt-O-Meal’s product was recalled based on suspicion of salmonella contamination, not the actual presence of salmonella contamination. Netherlands further argued that even if Main Street could establish that there was “property damage” under the policy, the Product Recall exclusion in the policy would nonetheless bar coverage.

 

But the Court rejected both of Netherlands’ arguments. The Court found that even though Malt-O-Meal’s product had not been confirmed to actually contain salmonella, property damage had occurred because the oatmeal was “physically affected, as it includes milk that was manufactured in insanitary conditions.” In addition, the Product Recall exclusion did not remove coverage for this property damage because Malt-O-Meal sued Main Street for damages associated with Malt-O-Meal’s recall of its own products, not Main Street’s products. The fact that Malt-O-Meal’s recall was triggered by the tainted product supplied to it by Main Street was insufficient to bar coverage under the Product Recall exclusion.

 

Michael Best counsels clients on insurance coverage matters and manages complex insurance litigation cases.  Consider talking to your insurance provider, or consult an attorney, to review the details of your policy to identify the risks related to your operation and policy language. Contact Lee Seese, lmseese@michaelbest.com for additional information.  As for food safety matters, Michael Best counsels clients to prevent and react to safety issues, and to comply with applicable laws and regulations. Skills include: defending personal injury and property damage claims, crafting recall policies and procedures, advising on Good Manufacturing Practice (GMP) and Hazard Analysis and Critical Control Point (HACCP) requirements, defending class action cases, retention of consultants for testing and other procedures, preparation of food and dietary supplement labeling in compliance with FDA’s complex regulatory scheme, preparing and prosecuting food additive and new dietary ingredient submissions, and other regulatory compliance.

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