The Netherlands Ins. Co v. Main St. Ingredients et al. (Index No. 11-533)
In testing the limits of coverage for recall of food products, the federal district court of Minnesota found in favor of an insured for claims related to “property damage” despite the uncontroverted fact that the recalled product was not contaminated.
In The Netherlands Ins. Co v. Main St. Ingredients et al. (Index No. 11-533), insured purchased instant milk from a third-party and subsequently sold it to another third-party who subsequently mixed it with its own product to create instant oatmeal. Several years later, the Food and Drug Administration determined that the manufacturing facility of the original third-party from whom insured purchased the instant milk contained insanitary conditions and salmonella. The original third-party recalled all instant milk, including that used by the instant oatmeal manufacturer. The instant milk was never tested positive for salmonella. The instant oatmeal manufacturer sued insured for damages related to the recall. Insured sought defense and indemnity from its insurer. The insurer brought a declaratory action and moved for summary judgment, insured subsequently cross-moved.
The court noted that in order to establish a prima facie showing of coverage, it must demonstrate: (i) an occurrence; (ii) that it was not a known loss; and (iii) property damage. The court quickly determined the first two prongs had been met and then went into discussion over the third prong. Insurer argued that the instant oatmeal contained no salmonella and thus, the product was not damaged. The court looked to the definition of “property damage” and found it to include “‘physical injury’ to tangible property” which was less restrictive than “direct physical loss” language utilized in other policies. It further referenced Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) for the proposition that an inability to distribute products due to FDA regulations is “an impairment of function and value sufficient to support a finding of physical damage.” Accordingly, under the language of the relevant policy, there was a duty to defend and indemnify insured for costs associated with the recall, even though there was no actual damage to the instant oatmeal and even though the damages consisted of economic costs (e.g., destroyed inventory, credits and fees to customers, etc.).