- U.S. District Court Agrees with Insurer’s Interpretation of Accidental Product Contamination and Grants Summary Judgment on All Counts
- October 11, 2011 | Authors: Debra A. Adler; Joseph F. Bermudez; Robert F. Roarke; Mathew P. Ross
- Law Firms: Wilson Elser Moskowitz Edelman & Dicker LLP - White Plains Office ; Wilson Elser Moskowitz Edelman & Dicker LLP - Denver Office ; Wilson Elser Moskowitz Edelman & Dicker LLP - White Plains Office
On September 22, 2011, the United States District Court for the Northern District of Illinois, Eastern Division determined that no coverage existed under an accidental product contamination policy where the products were never actually contaminated with harmful bacteria.
In Little Lady Foods, Inc. v. Houston Casualty Company, No. 1:2010cv08280 (U.S. District Court, Northern District of Illinois, Eastern Division), the policyholder, Little Lady Foods, began producing a burrito product for a convenience store. The cooking process used by Little Lady left the burrito partially uncooked.
Pursuant to U.S. Department of Agriculture (USDA) regulations, Little Lady was required to perform laboratory tests on the uncooked products and the equipment used to prepare them for the presence of harmful bacteria prior to shipment. These tests revealed the presence of bacteria within the listeria genus, which includes seven strains of bacteria. Of the seven strains, only listeria monocytogenes (LM) is likely to cause bodily injury, sickness, disease or death in humans. The tests performed on the burrito products did not reveal which strain of listeria was present.
After receiving the results of these tests, Little Lady quarantined 57,000 cases of product, as required by USDA regulations. At that same time, Little Lady submitted a claim for the loss associated with its burrito products under its accidental product contamination policy. The insurer advised Little Lady that further testing was needed to determine if LM was present in the product. Subsequent testing specific for LM yielded negative results. Because there was no LM present in any of the burrito products, the USDA released the 57,000 cases from hold. A portion of the product was sold on the secondary market for consumption and some was destroyed due to quality issues from the handling and testing.
The Coverage Determination
The policy defines “accidental product contamination,” in relevant part, as: any accidental or unintentional contamination, impairment or mislabeling...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 PRODUCT(S) 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).
After receiving the results of the additional testing, the insurer denied coverage on the grounds that an “accidental product contamination” had not occurred since LM, the only strain of listeria known to be a disease-producing agent, was not found on the product. While there were forms of listeria found on the products and equipment, the other six strains of listeria would not likely result in physical symptoms of bodily injury, sickness, disease or death. Further, the policy does not cover losses incurred based solely on Little Lady’s belief that their product could cause illness.
Little Lady commenced an action against the insurer seeking a judgment declaring it was entitled to coverage under the policy as well as damages for breach of contract and bad faith allegations.
The crux of the argument between the insurer and Little Lady was the interpretation of the phrase “may likely result in” within the definition of “accidental product contamination.” Little Lady argued that at the time the claim for coverage under the policy was submitted, it was possible, if not probable, that harm would result from selling the product. The insurer argued that because the products were never actually contaminated with harmful bacteria, no “accidental product contamination” had occurred, as defined by the policy.
The Court found that only the insurer’s interpretation of the policy was reasonable and determined that “...harm to consumers was neither probable nor possible in this situation. The parties agreed that the product did not contain LM, the only harmful strain of the listeria genus. Little Lady’s temporary belief that it might contain LM is therefore irrelevant.” With respect to Little Lady’s interpretation, the Court held: “Little Lady is essentially 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.” The Court further determined that because the policy did not provide coverage for the claim, the insurer did not breach the contract nor act in bad faith.
The decision in Little Lady is significant because a federal court has distinguished between the role and purpose of USDA regulations and coverage under the policy. This is a prevalent argument typically made by insureds in these types of claims. Of further significance is the court’s determination that the insurer’s interpretation of the policy did not conflict with public policy.