January 30, 2013

Summary: It seems as though notices regarding food contamination are almost a daily event. As these events continue so, too, will the demand for insurance. Since commercial property policies are not likely to cover physical loss or damage to a named insured's products (unless the cause cannot be determined), businesses are turning to specialty product policies. The problem here is that coverage is not on an “all-risk” basis. This means that if coverage applies, it has to meet the precise provisions of these policies which some people are likely to describe as trying to fit a square peg into a round hole.

The cases discussed confirm the frustrations of insureds with special product policies. Another big exposure is loss of business income and extra expense. This kind of coverage appears to be scarce. ISO, however, has introduced a limited form of this coverage, which is likely to be welcomed for the smaller risks. It is also discussed in this article.

Topics Covered:

Introduction
Food Contamination—Special Policy
Accidental Contamination Coverage
Special Products Insurance
ISO's Limited Coverage
Conclusion

Introduction

Purchasing insurance policies for special risks can be an exasperating task because the policy must be a perfect fit or the purchaser may go uncompensated. It is like purchasing a property policy on a named perils basis. Unless the right perils are selected, the insured may not be covered.

One category of specialty policies that has been troublesome for purchasers involves environmental matters. Many different environmental liability policies are available today. The number of court cases prove that selecting the right coverage for the exposure can be troublesome.

Another category of coverage where selection has proven to be problematic is coverage for known or suspected products contamination, particularly since property policies generally exclude product contamination, and liability policies exclude damages for the costs and expenses of having to recall products from the market or from use because of a known or suspected defect or deficiency.

Over the years, there have been notable cases over the property coverage issues of products. One such case is Pillsbury Co. v. Underwriters At Lloyd's, London, 705 F. Supp. 1396 ( D. Minn 1989). The disputed loss occurred at a subsidiary's processing plant in Canada. The subsidiary determined that cream-style corn being canned was under-processed, making it susceptible to spoilage. Despite efforts to determine the cause, the subsidiary decided to destroy all of the corn processed at that plant during the 1985 harvest, which had a certain kind of tin-free lids. A small portion of the cream-style corn had been processed in cans with electrolytic tin-plated lids, which were determined to be satisfactory. As a result the subsidiary believed that tin-free lids caused the cans to under-rotate, resulting in the under-processing of the product.

The named insured sought coverage under its property policy for the destruction of cream-style corn cans amounting to $6 million. One insurer agreed to pay, but Lloyds Underwriters and the other defendants denied coverage, citing the faulty workmanship and inherent vice exclusions. The problem for the defendants was that they could not show what workmanship had been faulty. And, while the cost of faulty workmanship was not covered, the same was not true for product defects. Both parties asserted that the process failed in some manner but could not pinpoint the cause. Fortunately for the named insured, the policy was written on an all-risks basis.

A cheese manufacturer, which had a property policy subject to a contamination exclusion, had a dispute over coverage with its insurer in Leprino Foods Co. v. Factory Mut .Ins. Co., 453 F.3d 1281 (10th Cir. 2006). The loss involved over eight million pounds of mozzarella cheese, resulting in damages of over $13 million. The district court ruled against coverage. (Another issue involving reasonable expectations led to the matter being remanded for a new trial.)

The named insured sought a three-year all-risk property policy from Arkwright Insurance Company, a predecessor company to Factory Mutual. The proposed policy contained an exclusion for “contamination including but not limited to pollution; shrinkage or change in color, flavor, texture or finish; all unless such damage directly results from other physical damage and excluded by this policy.” The named insured sought to delete the language regarding “change in color, flavor, texture or finish,” noting that to leave such wording in the exclusion would effectively negate any coverage for the product while it was being stored. The insurer agreed and amended the exclusion so that coverage did not apply to “contamination including but not limited to pollution; or shrinkage; all unless such damage directly results from other physical damage not excluded by this Policy.”

After Arkwright merged into Allendale Mutual Insurance Company and became Factory Mutual, the named insured was told that while the company's name had changed, the policy's rights and obligations had not changed. The problem was that the exclusion had to be changed because it again read as it originally did with the Arkwright Insurance Company. After receiving complaints about an off-flavor in both raw and cooked cheeses, the named insured traced the cheeses to a third-party warehouse. The insurer found through testing that a number of chemicals contaminated the cheese, which had to be recalled and could not even be used as feed for animals. While both sides produced some interesting arguments, the matter was not resolved. The district court's grant of partial summary judgment in favor of Factory Mutual was reversed, along with the district court's denial of a motion for a new trial.

Another products case of interest is Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 794 N.E.2d 607 (Mass. App. 2003). The named insured was a coffee roasting company that sustained a loss when one of its employees caught his fingers in the grinding machine. The severed parts of the hand resulted in contamination and the destruction of over 16,000 pounds of blended coffee. Fortunately, there was no dispute that the loss of the coffee constituted a covered property loss. The dispute, instead, was over the calculation of damages at actual cash value.

Food Contamination—Special Policy

The preceding cases all involved property policies that not only covered the named insured's products, but also other tangible property, both real and personal. What is likely to be equally as interesting is how insureds fare with disputes over their products covered by special policies. For the most part, this appears to be a more difficult endeavor for policyholders.

A Case Involving Salmonella

One case involving food contamination, and a special policy that did not provide coverage, is Ruiz Food Products, Inc. v. Catlin Underwriting U.S., Inc., 2012 WL 4050001, No. 1:11-cv-00889-BAM (E.D. Cal., Sept. 13, 2012). Ruiz produced frozen Mexican food products for distribution to retail customers. One of these products—Tornados—was a ready-to eat product similar to burritos. One of the ingredients incorporated into Tornados was a beef spice mix produced by Superior Quality Foods, Inc., (Superior). The beef spice mix contained a product (HVP) that was manufactured by Basic Food Flavors (Basic).

Beginning in January 2010, the FDA conducted several inspections of the Basic production facility. Environmental samples collected from that facility, near the food processing equipment, tested positive for salmonella on three different dates. In February 2010, a sample from a finished lot of HVP tested positive for salmonella. Basic continued to manufacture the HVP under the contaminated conditions until February 2010. Basic then issued a Class One recall for all HVP products manufactured on or after September 17, 2009. A Class One recall is issued when products have “reasonable probability that use of the product will cause serious, adverse health consequences.” Only one lot of Basic's HVP tested positive for salmonella, and that particular lot was not sent to Superior and, thus, did not reach Ruiz. Superior issued a recall of its beef spice mix on March 1, 2010. Following receipt of Superior's recall notice, Ruiz placed a hold on its Tornado products and tested them on six different dates. Each of tests was negative for salmonella.

The FDA announced Basic's recall of HVP products due to salmonella contamination and advised the industry that the recall bulk HVP product should be destroyed or reconditioned according to FDA-approved procedures. Ruiz contacted the Food Safety Investigation Services (FSIS) after receiving notice of the recall. Ruiz attempted to avoid a recall because the HVP constituted only .0007 percent of its Tornado product and sample testing for salmonella proved to be negative. Ruiz, nonetheless, was required to recall its product because it incorporated HVP from Basic that was subject to the FDA recall.

Ruiz then made a claim under its Product Contamination Policy, which provided coverage for an insured event, which includes an “accidental contamination.” An accidental contamination, in turned, was defined as follows:

[A]ny accidental or unintentional contamination, impairment or mislabeling of an Insured product(s), which occurs during or as a result of its production, preparation, manufacture, packaging or distribution; provided that the use or consumption of Insured product(s):

(I) Has resulted in or would result in clearly identifiable internal or external physical symptoms of bodily injury, sickness, disease or death of any person(s) within one hundred and twenty days (120) days following such consumption or use.

Section 3.6 of the policy defined an “Insured product” as:

(I) All topical and ingestible products for human consumption or any of their ingredients or components, that are identical with or similar to and requiring the same manufacturing processes and infrastructure as products reported to the Insurers on the Application on file with the Insurers or by addendum to such Application and which are as Specified Insured product(s) in the Declaration AND are

a. In production by the Insured or

b. Have been manufactured, handled or distributed by the insured or

c. Manufactured by any contract manufacture for the Insured or

d. Are being prepared by the Insured for or are available for sale.

The parties disputed whether the circumstances of Basic's recall of HVP products and Ruiz's related recall of its Tornado products triggered coverage under the policy. Catlin Underwriting argued there was no coverage for the following reasons:

(1) None of the products received by Ruiz tested positive for salmonella, so there was no contamination of an insured product;

(2) Potential contamination did not constitute an impairment of an insured product;

(3) Even if there were a contamination or impairment, such contamination or impairment took place at Basic's facilities and, thus, did not occur “during or as a result” of Ruiz's production of Tornados; and

(4) there was no contamination or impairment, so consumption of the Tornados could not result in injury, sickness, or death.

Ruiz, on the other hand, argued that the potential salmonella contamination of HVP, as well as Basic's subsequent recall of its HVP products, qualified as both a contamination and an impairment under the policy's terms. Also, the policy language did not require the contamination or impairment to take place during Ruiz's manufacture of Tornados. Finally, it also argued that because the Tornados were potentially contaminated and otherwise impaired, the potential contamination could possibly result in injury, sickness, or death.

From the court's perspective, under a first party named or specific perils policy, such as the Product Contamination Policy at issue, “the insured has the threshold burden of proving that the loss was caused by the specifically-enumerated peril.” Accordingly, the court added, Ruiz had the burden to demonstrate that the subject recalls, and the related circumstances, were events within the scope of the basic coverage. Based on the governing language of the policy, the court explained that Ruiz was required to establish any accidental or unintentional contamination, impairment, or mislabeling of an insured product that occurs during or as a result of its production, preparation, manufacture, packaging, or distribution and where use or consumption of the insured product has resulted or would result in clearly identifiable internal or external symptoms of bodily injury, sickness, disease, or death.

The named insured's policy was held not to cover the loss for the following three reasons: (1) the Tornados were not contaminated; (2) a Class One recall by itself did not qualify as contamination under the special policy; and (3) the product was not impaired even though the policy defined accidental contamination as “contamination or impairment.”

A Case Involving E.coli

Another case that ended in no coverage is Fresh Express Inc. v. Beazley Syndicate 2623/623 At Lloyd's., 199 Cal.App.4th 1038 (2011). In 2006, the U.S. Food and Drug Administration (FDA) issued an alert advising that “consumers not eat bagged fresh spinach due to an outbreak of E.coli.” The FDA advisory disclosed that there had already been reports of fifty cases of illness and one death. The FDA withdrew its advisory two weeks later after the source of the outbreak had been identified.

Fresh Express, which marketed bagged fresh spinach and other leafy greens, did not own any farms. It purchased all of its produce, and its primary supplier was Fresh Farms which, although growing most of its own produce, sometimes made “spot purchases from other growers.” Fresh Farms followed Fresh Express's good agricultural practices, which were designed to reduce the risk of contamination. Between July 31 and August 21, 2006, Fresh Express made thirteen spot purchases of spinach. Some of the purchases violated Fresh Express's company policies. After August 21, 2006, Fresh Express's spinach purchases were from Fresh Farms, its primary certified supplier.

Between September 8 and 12, 2006, the Centers for Disease Control and Prevention (CDC) was informed by investigators in two states that they suspected bagged fresh spinach was the source of an E.coli outbreak. This type of E.coli was a very virulent organism and an extremely dangerous pathogen that causes life-threatening illness. Cattle are the primary source, but the pathogen can also be spread by wild animals and birds. This pathogen also attaches to fresh produce and cannot be removed in processing or washed off by the consumer. A very small amount of contaminated produce could cause the contamination of a large amount of produce if the contaminated produce is processed in the same processing facility as previously uncontaminated produce. Laboratory testing can distinguish between these different strains, which can help in tracking an outbreak to a source.

In September 2005, The FDA became involved when a third state made a report of infected persons. At this time there were forty-five reported cases, and they continued to be linked to bagged fresh spinach. The outbreak was declared a nationwide event and involved many more people than one would typically see from a produce-borne outbreak. The constantly increasing number of cases was quite alarming to the FDA.

The FDA contacted Fresh Express and two other spinach processors and told them that they would be issuing an advisory and recommended that the companies take steps to recall. The FDA had no idea which brands were responsible for the outbreak, so it lacked the authority to do anything other than issue an advisory. In September, the FDA issued a no consumption advisory, which advised that consumers not eat bagged fresh spinach due to an outbreak of E.coli. The FDA received extreme media coverage, and the outbreak became one of the major news stories in the U.S. Within twenty-four hours bagged spinach had been completely removed from grocery stores throughout the U.S.

Most spinach processors responded to the advisory by withdrawing their products from the market. They stopped sending spinach to retailers but did not recall the spinach that had already reached retailers. Within a few hours of the FDA's advisory, Fresh Express decided to stop harvesting, processing, and distributing spinach products. Although the FDA advisory said nothing about non-spinach products, there was also an immediate big consumption drop in all leafy greens.

Fresh Express was not the source of the E.coli outbreak, but sustained a significant loss of business in the wake of the FDA advisory. As a result, Fresh Express sought to recover its losses under its TotalRecall+ insurance policy issued by the Beazley syndicate and QBE Insurance. Beazley denied the claim and litigation ensued. Fresh Express prevailed at trial and recovered the $12 million limit. Beazley, however, appealed and claimed that, because the trial court erroneously defined the term insured event under the policy as an E.coli outbreak, the court awarded damages that did not come within the policy's coverage. The appeals court reversed the judgment in favor of Beazley.

The policy issued by Beazley to Fresh Express was referred to as TotalRecall+ – Brand Protection. The policy type was identified as Malicious Contamination, Accidental Contamination and Products Extortion Insurance. Only the Accidental Contamination coverage was at issue for which Fresh Express paid a premium of over $300,000 subject to a limit of $12 million per insured event and in the aggregate.

The policy's insuring agreement provided that Beazley would reimburse Fresh Express for loss arising out of insured events incurred by Fresh Express only where such losses arise due to accidental contamination, under which pre-recall expenses, recall expenses, customer recall expenses, product rehabilitation, loss of gross profits, and increased cost of working and crisis response were covered.

Accidental contamination was defined as “Error by [Fresh Express] in the manufacture, production, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling (including instructions for use) of any Insured Products or error by [Fresh Express] in the storage or distribution of any Insured Products whilst in the care or custody of [Fresh Express] to have reasonable cause to believe that the use or consumption of such Insured Products has led or would lead to i) bodily injury, sickness, disease or death of an person(s) or animal(s) physically manifesting itself by way of clear, obvious or visible symptoms within 120 days of use or consumption or ii) physical damage to or destruction of tangible property (other than the Insured Products themselves).”

Insured event was defined by the policy as “Malicious Contamination, Products Extortion or Accidental Contamination.”

Recall expenses was defined as “those reasonable, customary and necessary expenses itemized below which are incurred by [Fresh Express] and which are devoted exclusively to the purpose of the recall or withdrawal of Contaminated Product(s) arising out of an Insured Event.”

Product rehabilitation was defined as “sales and marketing expenses, including reasonable and customary shelf space and slotting fees, up to an amount forming part of but not exceeding the amount in Item 9 of the Schedule, necessarily incurred by [Fresh Express] in order to meet legal rehabilitation requirements and/or to reasonably reestablish the sales level and the market share of those Insured Product(s) affected by an Insured Event to the level reasonably projected, taking into account the reasonable projection had no Insured Event occurred and all material changes in market conditions of any nature whatsoever, prior to the Insured Event.”

The following were excluded by the policy: (a) any expenses incurred by Fresh Express or any loss of gross profit for any reason other than as a direct result of an insured event; (b) any governmental ban of or loss of public confidence in any insured product or any material or substance used in any insured products; and (c) loss or damage directly or indirectly occasioned by the order of any governmental or public or local authority.

Fresh Express's first amended complaint alleged that its violations of company policies in making purchases from other suppliers were errors under the policy that gave Fresh Express reasonable cause to believe that its products were partially responsible for the E.coli outbreak. It sought to recover the policy limit of $12 million plus prejudgment interest and attorneys' fees. The action was tried in court. Fresh Express's two damages experts testified that Fresh Express had suffered $18.8 million in losses between September and December 2006, which it assumed was the insured event. The president of Fresh Express testified at trial that his company had lost $50 million as a result of the outbreak and the FDA advisory.

Eight categories of damages caused by the outbreak were identified: lost profits on spinach; lost profits on non-spinach products; contractual payments; in-field contractual obligation costs; customer credit memo costs; facility centers disposal costs; rebranding costs; and consultant costs. These losses included the impact on both spinach and non-spinach products because the E.coli outbreak caused a substantial decrease in sales and demand for all of its products, not just spinach products.

The California trial court issued a ruling finding that Fresh Express was entitled to recover $12 million from Beazley. The court also concluded that Beazley had breached the insurance policy because Fresh Express had established the following errors within the meaning of its policy in the form of purchases from other suppliers: (1) spot purchasing spinach from Seco Packing, without conducting the required pre-harvest audit, and then manufacturing, processing, preparing, assembling, blending, and mixing that spinach with other properly inspected spinach at its processing plant, thereby creating an unacceptable risk of cross-contamination; and (2) spot purchasing from another supplier a lot that had been specifically prohibited by Fresh Express's food safety auditor and allowing this spinach to be mixed and blended with spinach from other sources, thus creating cross-contamination. The trial court concluded that the insurance policy did not require a recall for Accidental Contamination coverage to be triggered.

Beazley's primary contention on appeal was that trial court misinterpreted the meaning of the policy when it concluded that the E.coli outbreak was an insured event under the policy's coverage for accidental contamination. Beazley did not challenge the trial court's factual finding that an insured event of accidental contamination had occurred. It, instead, contended that the court erred because all of the losses established by Fresh Express at trial were attributed to the E.coli outbreak, an event that was not covered by the policy, rather than to accidental contamination, the only event that was covered by the policy. Since the E.coli outbreak was not attributable to an error by Fresh Express, Beazley argued that the outbreak could not qualify as an insured event under the policy.

Fresh Express claimed that the policy did not require that the insured event be the result of any error by Fresh Express. It claimed that all the policy required was that its errors were sufficiently serious to link it to the E.coli outbreak. It also maintained that the insured event was the product recall or withdrawal that followed from the recognition that there was reasonable cause to believe that the insured's products could have caused harm if not removed from the market. In Fresh Express's view, nothing in the policy required that the products actually cause the outbreak.

The court of appeals saw matters differently in stating that the policy language unambiguously rebutted Fresh Express's view. The policy provided that Beazley would “reimburse Fresh Express for losses as specified in the policy arising out of Insured Events…incurred by Fresh Express…only where such losses arose because of…Accidental Contamination (or another specified Insured Event.)” Therefore, the court said that the only insured losses were those that arose from, and because of, an insured event. Only three insured events were covered by the policy, the court of appeals explained, and the only insured event at issue was accidental contamination. The policy, the court added, also explicitly excluded “any expenses incurred by Fresh Express or any loss of Gross Profit for any reason other than a direct result of an Insured Event.” Thus, the court said, the only recoverable losses were those that were the direct result of an error by Fresh Express.

From the court's perspective, there was no question that substantial evidence existed to show that Fresh Express made errors within the meaning of the policy. However, the court said there was no evidence that these errors had any connection to the E.coli outbreak or to the FDA advisory. None of Fresh Express's spinach associated with its errors was ever linked to the E.coli outbreak, the court added, and the FDA had no knowledge of Fresh Express's errors when it issued its advisory, which was issued for independent reasons. Thus, neither the E.coli outbreak nor the FDA advisory arose from Fresh Express's errors. The sole cause of the E.coli outbreak, and the FDA Advisory, the court concluded, was the contamination spinach of National Selection Foods, not any errors by Fresh Express.

Another case where the manufacturer's product insurance needs fell short of the mark is Little Lady Foods, Inc. v. Houston Cas. Co., 819 F. Supp.2d 759 (N.D. Ill., 2011). In early 2010, Little Lady began producing a burrito product through a new process that left the burrito partially uncooked when it left its plant. As a result of this process, Little Lady was required under its Hazard Analysis and Critical Control Plan (HACCP), as well as by the U.S. Department of Agriculture (USDA) to perform laboratory tests on the product and equipment for the presence of harmful bacteria before shipment. The tests performed in early 2010 indicated that six samples showed the presence of listeria bacteria, which is likely to cause bodily injury, sickness, disease, or death to humans. As a result, Little Lady could not distribute the product until it confirmed that listeria was not present.

When Little Lady learned of the presence of listeria in the burrito product samples, it notified the USDA and its customers and placed a hold on 57,374 cases of the product. Because it was determined that listeria was not present in any of the burrito product, part of the product was sold on the secondary market for consumption by consumers and some was destroyed due to quality issues from handling and testing it.

Little Lady notified its insurer, Houston Casualty, of the test results indicating the presence of listeria and made a claim for coverage under its accidental product contamination section of its policy, which also covered malicious product tampering. After receiving the test results showing that listeria was not present, the insurer denied coverage on the grounds that any loss was not the result of an accidental product contamination. The insurer did not pay anything, including costs of further testing the burrito product.

The crux of this case was the interpretation of the accidental product contamination definition in the policy. More specifically, the case turned on the reasonable interpretation of the phrase “may likely result” within that definition. Accidental product contamination was defined in relevant part to mean the following:

Any accidental or unintentional contamination, impairment or mislabeling (including mislabeling of instructions for use) during the manufacture, blending, mixing, compounding, packaging, labeling, preparation, production or processing…of [Little Lady's] PRODUCTS…provided always that the consumption or use of [Little Lady's] CONTAMINATED PRODUCTS has, within 120 days of such consumption or use, either resulted, or may likely result, in…physical symptoms of bodily injury, sickness or disease or death of any person(s).

The insurer argued that because none of Little Lady's products were ever actually contaminated with harmful bacteria, there was no accidental product contamination. Little Lady's temporary belief that harm might likely result from listeria bacteria that were present was irrelevant because there never actually was any such danger. Little Lady countered that when it filed a claim, the facts before it made it possible, if not probable, that harm would result from selling the product. Little Lady focused on its own HACCP and that the USDA required it to place a hold on the product when it tested positive for listeria generally and that it bore significant costs as a result.

The court found the insurer's interpretation to be reasonable. The parties engaged in a great deal of debate over whether the phrase “may likely result” meant that harm to consumers must be probable or merely possible, but the court stated that debate missed the point because harm to consumers was neither probable nor possible in this situation. The parties agreed that the product did not contain the harmful strain of listeria, so Little Lady's temporary belief that it might contain the harmful strain was irrelevant. Little Lady was asking the court to rewrite the policy to require a likelihood that a product is contaminated, rather than a likelihood that the contaminant it does contain is dangerous. Because Little Lady bore some costs as the result of its fear of contamination did not mean those costs were covered by the policy.

Accidental Contamination Coverage

Another case where the named insured's attempt for coverage under its Product Tampering and Accidental Contamination policy was foiled is The Limited, Inc. v. CIGNA Ins. Co., 228 F. Supp. 2d 574 (E.D. Pa. 2001). The Limited, through a subsidiary, (BBW) sold cosmetic and personal care products, among other things, in retail stores nationwide. One of the products in the BBW line was Foam Burst Moisturizing Body Wash, a shower gel that was aerosol-dispensed under pressure by a triggering device on the canister.

BBW entered into a licensing agreement with Cussons Limited to make, have made, use, consign, and to advertise, promote, market, sell, and otherwise distribute Foam Burst for a two-year period. After BBW started to import Foam Burst and to sell it, BBW began receiving complaints from consumers maintaining that they suffered eye injuries from that product. BBW subsequently issued a press release posted on the FDA website. The Limited proceeded to recall Foam Burst from the stores and attempted to return the product to the market in a different canister. In the process, The Limited incurred substantial costs in connection with the recall, the reintroduction of Foam Burst, and lost sales. When The Limited sought coverage under its policy, the insurer denied it. The Limited therefore filed an action maintaining that its recall fell within the terms of coverage.

The policy, in question, was purchased from CIGNA, now known as ACE American Insurance Company (ACE), for an aggregate limit of $10 million for each loss per year, subject to a $100,000 deductible. The policy contained the following definitions for accidental contamination and covered product:

Accidental Contamination means any accidental or unintentional, adulteration or pollution of a Covered Product(s) which occur while you are manufacturing, producing, processing, preparing, packaging, or labeling the Covering Product(s) if such contamination, adulteration or pollution:

1. has resulted or would result in bodily injury, sickness, disease or death to any person or animal if consumed or used; or

2. has caused or would cause physical damage to or destruction of tangible property; or publicity specifically naming you or your Covered Product(s) as the subject of an Accidental Contamination covered hereunder.

Covered Product(s) means those products (or any of their ingredients or components) manufactured, distributed, handled or sold by you or for you by others and listed in the Declarations.

Covered Product(s) also means any new product line(s) introduced or acquired after the inception of this policy, provided written notice is given to us within ninety (90) days of such introduction or acquisition.

The Limited maintained that its special policy clearly provided coverage for its losses because its Foam Burst product was adulterated, and that the adulteration was unintentional. The insurer asserted that its named insured could not prove it sustained a covered loss resulting from accidental contamination of a covered product, as defined. The named insured had the burden of proving coverage for accidental contamination and was required to establish an accidental or unintentional adulteration of a covered product that occurred while the Foam Burst was being manufactured, produced, processed, prepared, packaged, or labeled by the named insured or anyone acting on its behalf with whom it had a written agreement.

The first burden that confronted The Limited was to establish an accidental contamination. In that regard, The Limited argued that Foam Burst was accidentally contaminated by an unintentional adulteration. The parties, however, differed on how the term adulteration should be interpreted. The Limited argued that since adulteration was not specifically defined in the policy, its meaning should have been examined in light of the business purposes sought to be achieved by the parties and its common sense meaning.

The Limited maintained that the definition of adulteration set forth in the federal Food, Drug, and Cosmetic Act (Act) applied to the Foam Burst product and the claim in question. The insurer argued that the absence of a definition of adulteration in the policy did not render the term ambiguous. Instead, the undefined word should have been given its plain and ordinary meaning.

Referring to Black's Law Dictionary 7th ed., the court found the verb to adulterate defined as “[t]o debase or make impure by adding a foreign or inferior substance.” Similarly, Webster's New World Dictionary (College Edition 1969) defined adulterate as “to make inferior, impure, not genuine, etc., by adding a poor or improper substance.” Under the Act, a cosmetic, such as Foam Burst, was deemed to be adulterated “if it bears or contains any poisonous or deleterious substance which may render it injurious to users…[of if] its container is composed, in whole or in part, of any poisonous or deleterious substance which render the contents injurious to health.” 21 U.S.C. Sec. 361 (d).

The court found that the term adulteration in the policy's definition of accidental contamination was susceptible to more than one meaning. It was not clear from the policy, from the court's perception however, whether adulteration should be defined by a dictionary or the Act. In either case, the court concluded that whether it used a dictionary definition or the definition set forth by the Act, the Limited had failed to demonstrate that the Foam Burst product was adulterated or accidentally contaminated under the policy provisions. It was clear to the court that the Foam Burst was not adulterated under the dictionary definition of the word. It stated that there was no substance—poor, foreign, improper, or inferior—added to the Foam Burst. There also was no evidence to suggest the product was debased, made impure, made inferior, or made not genuine by another substance. Rather, the evidence showed that the Foam Burst canister or container was defective.

The court was also convinced that the term adulteration in the policy was not meant to apply to the instant situation because of the context of the policy provision. The policy was titled Product Tampering and Accidental Contamination Insurance Policy, and the term, adulteration was used in defining accidental contamination together with the terms contamination and pollution. The court added that the plain meaning of the policy and its title indicated that the parties intended to have coverage for only those specific instances of product tampering and accidental contamination, not for product recalls in general or for defective canisters. There was no product tampering and no evidence that the Foam Burst product was accidentally contaminated or adulterated, as those terms were defined in the policy. Accordingly, judgment was rendered for the insurer.

Special Products Insurance

Unfortunately for purchasers of insurance, buying special products insurance is like trying to fit a square peg in a round hole. Either the coverage is arranged to fit the exposure precisely or no coverage will likely apply. It is not always that the exposures are not identified properly. Part of the problem is that insurance is not always available to cover all of the exposures. Whatever the case may be, those in need of insurance for their products need to look to other markets because commercial property policies are likely to fall short in covering damage to the products themselves, even though the meaning and scope of “physical loss or damage” are somewhat elusive.

Property policies are not likely to cover the products against physical loss or damage, even if they are physically contaminated, because policy exclusions such as faulty workmanship and faulty production may be a deterrent. Another reason may be that the nature of the claim would not fall into the category of physical loss or damage, such as product tampering. This is not to say that a property policy will not cover product-related contamination. In fact, this is likely the reason ISO introduced an exclusion to its commercial property provisions in 2008 titled, Loss or Damage to Products. This exclusion, an addition to Causes of Loss – Special Form, CP 10 30, precludes coverage for loss or damage to any merchandise or other product caused by or resulting from error or omission in any stage of development, production, or use of the product, including planning, testing, processing, packaging, installation, maintenance, or repair. The only exception to this exclusion is an error or omission resulting in a covered cause of loss. In that case, the insurer agrees to pay for loss or damage caused by that covered cause of loss. This exclusion is not limited to food products but, instead, applies to all kinds of products even though a day does not go by when some notice is posted about another food product that is potentially the cause of serious illness or death.

One of the costlier exposures confronting producers of products not only is the loss to the products and the injury or damage it can cause to consumers, but also loss of business income. When the production line is down and an investigation has to be undertaken, the daily expenses can mount. None of the special products that are on the market appears to cover loss of business income. And, of course, a manufacturer's commercial property policy that includes loss of business income insurance is not going to be activated unless the portion of the policy covering direct physical loss or damage first becomes payable.

ISO's Limited Coverage

Interestingly, one of ISO's 2012 commercial property revisions involves food contamination. ISO has introduced an option to cover extra expenses and business income losses arising out of food contamination. The new endorsement is Food Contamination (Business Interruption and Extra Expense), CP 15 05. To trigger coverage, the business described in the schedule must be ordered closed by the Board of Health or any other governmental authority as a result of the discovery or suspicion of food contamination, as defined in the endorsement. The term food contamination is defined as

an outbreak of food poisoning or food-related illness of one or more persons arising out of:

1. Tainted food you distributed or purchased;

2. Food which has been improperly processed, stored, handled or prepared in

the course of your business operations; or

3. Food which has been contaminated by virus or bacteria transmitted through

one or more of the your employees, including temporary and leased employees.

The loss of business income coverage is subject to a twenty-four-hour waiting period (or deductible). Coverage also applies to the cost to replace food that was or suspected of being contaminated. Other covered costs are the costs of cleaning equipment, medical testing, and vaccination and advertising expense. The limits for the coverages are on an annual aggregate basis.

Conclusion

It has be frustrating and disconcerting for companies that spent thousands of dollars for insurance to find that their specialty products liability policies do not cover losses into the millions of dollars. The larger companies may eventually be able to expense such losses, unlike smaller companies, but it still must be a big disappointment not to be able to fit the exposure precisely into the language of a policy. If there is any message here, it is that exposures must be identified and the policy provisions carefully reviewed to determine if there will be the possibility of coverage. Perhaps the court cases that continue to mount may also be a source for risk managers and others to ponder in analyzing the prospects for coverage.

While contamination appears to be an everyday occurrence, it is with food products that most of the problems appear to be arising. Many of these incidences probably can be reduced through the implementation of loss prevention and control procedures, given that a great deal of contamination comes about through employees. These procedures may be the only way to handle food contamination in many cases, given that special products policies can be expensive and commercial property policies are not likely to cover the kind of losses experienced.

The coverage introduced by ISO will likely be limited to smaller businesses involved in the food business, but it is still a coverage that is definitely needed. One may wonder, however, whether this endorsement's coverage might conflict with the ISO exclusion on its special causes of loss form, CP 10 30, concerning the loss or damage to products. Both this exclusion and the new endorsement need to be studied carefully so that insureds are not confronted with the same fate as businesses that have been purchasing special products insurance.