Peanut Distributor Not Entitled to Coverage Under Accidental Contamination Policy

The ripple effects of a food recall up and down the supply chain continue to play out in courts across the U.S.  Recalls are not simply a matter of an injured consumer making a claim against the manufacturer of a recalled food item. The complexities reside in the supply chain, as numerous companies are forced to issue recalls of their own if their products incorporate the suspected contaminated item, resulting in product destruction, customer reimbursements, testing/cleaning, consultation fees, and more. While many companies look up the supply chain for reimbursement, they simultaneously seek coverage from their insurers.  Many of the major food recalls over the past 5 years have spawned insurance coverage litigation between various players in the supply chain and their insurers, and have involved interpretation of “specialty” products such as contamination and/or recall policies. With a steadily developing body of case law, each case bears examination.

One noteworthy case involves a distributor’s request for coverage under an Accidental Contamination Policy for costs it incurred because it purchased salmonella-tainted peanuts from Peanut Corp. of America (“PCA”). Most in the industry remember the PCA recall, which at the time was the most extensive food recall in U.S. history and left the American public scared to buy peanut butter of any kind.

THE SCOOP

Caudill Seed & Warehouse Company (“Caudill”), a producer and distributor of numerous agricultural products, was a member of PCA’s supply chain. In 2009, Caudill experienced two contamination incidents, one involving its peanut products and the other involving alfalfa seed.  Caudill sought coverage for both incidents from Houston Casualty (“HC”) under an Accidental Contamination Policy and ended up in coverage litigation over HC’s coverage position.

Caudill purchased raw peanuts from PCA shortly before the PCA recall. During the recall, the FDA advised Caudill that its products “posed an acute, life-threatening hazard to health” and approved Caudill’s decision to pull its own peanut products.

THE FOOD FIGHT

HC denied Caudill’s subsequent claim for coverage under the policy. The policy defined “accidental product contamination” as:

  1. any accidental or unintentional contamination . . . during the manufacture, blending, mixing, compounding, packaging, labeling, preparation, production or processing (or storage on the premises of the Named Insured), of the Named Insured’s Products (including their ingredients or components), or PUBLICITY implying such[.]

HC denied coverage because there was no actual contamination or impairment during the manufacturing process. HC also denied because there was no publicity implying contamination or impairment of Caudill’s products — Caudill was not named in the FDA Enforcement Report and FDA correspondence directed only to Caudill was not made public.

The Court agreed with HC, ruling that the salmonella contamination originated with PCA, and therefore the peanuts were contaminated or impaired prior to Caudill’s receipt. Accordingly, the

contamination did not occur “during the manufacture” at Caudill’s facility.  The Court also agreed that there was no publication naming Caudill or its products.

SECONDI

As if the peanut recall weren’t enough, just a few months later the FDA detected salmonella in samples of rawalfalfa seeds Caudill purchased from an Italian supplier, causing Caudill to quarantine over $300,000 worth of alfalfa seed. Caudill sought coverage for over $800,000 in recall-related costs, including lost gross profit, destroyed inventory, customer returns and associated freight costs, labor costs, legal fees and consulting fees. HC offered approximately $175,000 in reimbursement for the sum of freight costs, lab costs/testing and lost gross profit (minus a modest deductible).

The parties asked to court to decide whether the remaining categories of damages constituted covered “recall costs,” which the policy referenced as

reasonable expenses necessarily incurred in the procedure of recall, inspection, examination, destruction or disposal

The policy form contained a non-exhaustive list of 12 specific categories of costs, including the “value of recalled or destroyed contaminated product,” but a policy endorsement deleted that specific category.  However, the court ruled that Caudill could still show that the product costs were “reasonable expenses necessarily incurred” because the list of categories was non-exhaustive and the endorsement did not exclude product costs.

The court also ruled as follows:

  • The court ruled that Caudill was not entitled to coverage for consulting fees because it failed to obtain HC’s consent in accordance with the policy.
  • The court also ruled that Caudill would be entitled to reasonable legal fees if necessarily incurred in the recall process. The court did not expand on the “necessarily incurred” component of the definition but appeared to conclude that HC would have to reimburse Caudill for some amount of fees Caudill incurred when it hired a law firm to assist with FDA compliance during the recall.
  • Finally, the court found that issues of fact precluded a finding of the specific amount of coverage HC owed for labor costs.  The policy provided coverage for additional labor costs related to hourly employees, but Caudill allegedly included salaried workers.

The Caudill Seed decision, which you can view here, Caudill Seed & Warehouse Co., Inc. v. Houston Cas. Co., 2012 U.S. Dist. LEXIS 146418 (W.D. Ky. Dec. 20, 2011), is another important decision regarding the scope of contamination coverage.

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Cozen O’Connor has a national team of attorneys experienced in handling food contamination and product recall coverage matters related to first-party, third-party and specialty policies. The firm also developed a Food, Beverage & Nutritional Products Industry Team to provide advice and counsel to a wide range of companies connected directly and indirectly to the food and beverage industry.
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