Insurer Liable For Contaminated Food Product Is “Occurrence” Under General Liability Policy

Insurer Liable For Contaminated Food Product Is “Occurrence” Under General Liability Policy

In Netherlands Ins. Co. v. Main Street Ingredients, LLC, — F.3d –, 13-1316, 2014 WL 1012793 (8th Cir. Mar. 18, 2014), the United States Court of Appeals for the Eighth Circuit, applying Minnesota law, recently held an insurer owed a duty to defend and indemnify for a loss arising out of an instant milk recall.  The court held the recall was an “occurrence” that resulted in “property damage” and the “recall” exclusion did not apply.  In 2007, Plainview Milk Products Cooperative sold dried milk to Main Street Ingredients, who in turn sold it to Malt-O-Meal for use in its instant oatmeal.  Two years later, the FDA found Salmonella in food-contact areas of Plainview’s facilities, prompting Plainview to issue a recall of its dried milk products produced in 2007, 2008, and 2009.  Malt-O-Meal, in turn, issued a recall of its instant oatmeal.  Malt-O-Meal brought the underlying action against Main Street and Plainview, asserting claims of strict products liability, breach of warranties, and breach of contract.  Main Street’s insurer, Netherlands Insurance Company, defended under a reservation of rights.

Netherlands then brought suit against Main Street and Malt-O-Meal seeking a declaration it did not have to defend or indemnify Main Street.  The Court found coverage applied to the strict liability claim but not to the remaining claims.  Malt-O-Meal and Main Street settled the underlying litigation a short time later for $1,400,000.  Netherlands appealed.

The Eighth Circuit affirmed.  The court first rejected Netherland’s argument the dried milk did not suffer “property damage” under the policy.  The court held “property damage” was present because the dried milk was processed in unsanitary conditions.  The court also found physical “property damage” because Malt-O-Meal’s oatmeal was legally unsaleable according the FDA rules.

The court rejected Netherlands’ argument Main Street’s liability arose from its contract and guarantees to Malt-O-Meal, not an “occurrence” as defined by the policy.  The 8th Circuit reasoned an “occurrence” can occur in a breach of contract context if the breach is not willful or intentional.  Because Main Street did not intentionally sell condemnable dried milk, the sale was an “accident” that constituted an “occurrence” under the policy.

Lastly, the court held the “your product” exclusion precluded indemnity for products sold by Main Street, but did not apply in this case because Main Street sought indemnity for damage to Malt-O-Meal product, not its own product.  The “impaired property” and recall exclusions did not apply.  The dried milk was not “impaired property” because it could not be “restored to use” and the oatmeal was “physically injured.”  The recall exclusion did not apply as the damages incurred were not for the recall of Main Street’s product, the recall was of Plainview’s product.

We will continue to monitor this and other decisions impacting insurance coverage.  If you have any questions about this, or any other matter, please give us a call.