THE SCOOP
This insurance coverage dispute arose out of a burrito product produced by Little Lady Foods that failed to make it to the market as expected. Prior to shipment to convenient stores, Little Lady had to test its burrito product and equipment pursuant to USDA regulations. Six samples tested positive for the listeria bacteria, causing Little Lady to place a hold on approximately 57,000 cases of the burritos pursuant to USDA guidelines. Little Lady then tendered a claim to Houston Casualty (HC) under the Accidental Product Contamination section of its policy.
HC advised that the policy applied only to contamination that could cause bodily harm. Little Lady’s initial testing did not differentiate between the different listeria strains, and only one of the sevens strains, listeria monocytogenes (LM), is likely to cause bodily injury or death in humans.
A second round of testing did not reveal the presence of LM. The USDA lifted the hold and Little Lady was able to sell some of its product on the secondary market; the rest had to be destroyed due to quality control issues.
THE FOOD FIGHT
HC denied coverage based on the absence of LM. The policy defined “accidental product contamination” as follows:
any accidental or unintentional contamination . . . 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)[.]
Little Lady filed suit in the North District of Illinois, arguing that at the time it learned of the contamination and provided notice to HC, there was a possibility that bodily injury “may likely result” from consumption of the burritos. HC responded that the test results showing the absence of harmful bacteria meant there was no possibility of bodily injury so the claim did not fall within the definition of “accidental product contamination.”
The court sided with HC, holding that “the hard to consumers was neither probable nor possible,” and “Little Lady’s temporary belief that it might contain LM is therefore irrelevant.” The court further stated that Little Lady’s interpretation of the policy would permit a company to file a claim “every time its products tested positive for bacteria of any kind” even if there was no likelihood that the contamination was dangerous. The court added that “the fact that Little Lady bore some costs as a result of its fear of contamination does not mean those costs are losses covered by the policy.” Accordingly, the court granted summary judgment to HC. Little Lady Foods, Inc. v. Houston Cas. Co., 2011 U.S. Dist. LEXIS 115491 (N.D. Ill. Sept. 22, 2011).
LEFTOVERS
The important lesson to be learned is that “accidental product contamination” coverage does not necessarily provide coverage for all instances of contamination. Insurers and policyholders alike should carefully scrutinize the language of each policy, many of which will have different restrictions and limitations on the scope of coverage. Moreover, if Little Lady tested for LM at the outset, perhaps it would have been able to minimize the economic impact of the USDA hold by getting the burritos to market in a more timely fashion.