Does CGL Apply?

The first line of defense for processors and manufacturers in these situations is the commercial general liability (CGL) policy. While notoriously broad in nature, the CGL form incorporates a number of limitations and exclusions that must be considered when adjusting these claims.

First off is the requirement that there be either bodily injury or property damage. The expectation of injury, no matter how certain, is not enough to trigger coverage. So, in the case of the salmonella-infested eggs, individuals who became sick after eating the eggs can allege “bodily injury.” They can also point a finger at the egg processor and/or farm and file a claim. In situations such as this one, insurers for the farms and processors have, at minimum, the responsibility to defend such claims.

However, when eggs are withdrawn from the market after salmonella is found in other eggs, there is no coverage for the loss of revenue suffered through the recall. It doesn't matter if the eggs were processed in the same place and in the same way as eggs that can be traced to people who were “injured.” The costs associated with the recall are not covered by the unendorsed CGL policy.

In addition to the requirement that there be bodily injury or property damage, the CGL includes an exclusion that is aimed specifically at these types of situations. The standard CGL form's exclusion “n” precludes coverage for damages claimed for any loss, cost, or expense that are incurred for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal, or disposal of the named insured's “product, “work” or “impaired property.” The exclusion applies if the product or work is withdrawn or recalled from use by any person or organization because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.

The exclusion — commonly known as the sistership exclusion — applies regardless of who withdraws the product or work from the market. In the case of the salmonella outbreak in eggs, the Food and Drug Administration (FDA) was able to request a recall, but the agency could not order one, and a voluntary recall resulted. Regardless of how the recall occurred, the sistership exclusion negated coverage unless the producers had purchased product recall insurance.

As noted in an FC&S Online(R) discussion written by Christine Barlow and Kelly Maheu regarding the Toyota recall publicity, the sistership exclusion typically precludes coverage for costs incurred when the named insured's product is withdrawn from the market as a preventive measure. Courts have interpreted that the sistership exclusion applies to claims for damage when, based on the failure of similar products, the insured's products are withdrawn from the market out of concern that they may contain a defect or may cause bodily injury or property damage. For example, in Atlantic Mut. Ins. Co. v. Hillside Bottling Co. Inc., the court held that coverage for Hillside's liability to beverage companies for contamination of carbonated beverages was barred by the sistership exclusion in the insured's policy. The recall in this case was general and extended to all beverages that bore the bottling company's plant code, whether they were actually contaminated or not. The court explained that the sistership exclusion excluded the cost of recalling apparently undamaged products to search for damaged components otherwise not yet discovered.

However, the CGL policies of the egg producers, processors, and restaurants that provided eggs that actually caused people to get sick would be triggered for, at a minimum, defense costs and medical payments. If the injured parties are successful in the claims against these insureds, then CGL should cover any settlements or judgments.

Defining Multiple Occurrences

Once we get to the point, another feature of the CGL policy must be considered in adjusting the claims; namely, how many “occurrences” are involved in situations where groups of people eating at one restaurant during a similar period of time. Years ago I was peripherally involved in a situation where dozens of people became ill after eating at a Mother's Day brunch at a restaurant. This particular CGL policy has a per-occurrence deductible, so the question became this: Was the entire brunch on Mother's Day an occurrence (one deductible), or was each person's trip through the brunch line an occurrence (multiple deductibles)?

The CGL policy defines occurrence as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Based on that definition, the injuries that occurred during that Mother's Day incident were considered to be one occurrence and, therefore, only one deductible was applied.

As we've seen in other situations involving the question of number of occurrences, however, some insureds would prefer that multiple occurrences be applied to avoid a problem of running out of limits. Therefore, insureds and insurance companies may switch their positions about whether there are one or multiple occurrences depending on the facts of the situation and the magnitude of the injuries or damage.

Diana Reitz, CPCU, is editorial director for the reference division of The National Underwriter Company. She may be reached at [email protected].