Sugar Substitutes: Trade Groups, Member Companies Litigate The Right To Call Themselves Sweet As Sugar By Any Other Name

Posted on May 9, 2012 by Chris Murphy — No Comments ↓

THE SCOOP

American food producers never seem to sour when it comes to pursuing consumer market share. The United States is the world’s largest consumer and manufacturer in the market for high-fructose corn syrup. Recently, consumers, and therefore U.S. food makers, have been moving away from the corn-derived sweetener in recent years. As a result, there is a lot at stake in controlling the trajectory of the sweetener industry. Currently, a dispute between the corn and sugar interests is being waged in the California courts over an alleged misleading advertising campaign. The lawsuit could significantly affect the role trade organizations play as surrogates for their industry constituents and, more importantly, the manner in which the constituents aggregate their interests through trade group membership.

In 2010, the Corn Refiners Association (“CRA”) submitted an application to the FDA seeking approval to change the labeling of high fructose corn syrup to “corn sugar.” The application coincided with CRA’s launch of its marketing campaign to rebrand high fructose corn syrup as “corn sugar.” The application generated significant media coverage, including opposition from consumer groups and the sugar industry. Though the application remains pending, the FDA wrote to the CRA in July 2011 to express its concern with the attempts to equate the terms high fructose corn syrup and “corn sugar,” stating: “We request that you re-examine your websites and modify statements that use the term ‘corn sugar’ as a synonym for (high fructose corn syrup).” The FDA, however, has no regulatory control over a trade association’s advertising because it is promoting an industry, not selling a product. In this instance, the FDA is limited to prosecuting companies that incorrectly label ingredients and could only pursue enforcement actions against companies whose labels list high fructose corn syrup as “corn sugar.”

The sugar industry did not sit idle.

THE FOOD FIGHT

In 2011, a consortium of sugar producers led by the Western Sugar Cooperative filed suit in the Central District of California against the CRA, Archer-Daniels and other CRA member companies. The sugar consortium sought an injunction and unspecified damages due to the CRA’s “Sweet Surprise” campaign to re-brand high-fructose corn syrup as “corn sugar.”

The lawsuit alleges violations of the Lanham Act (15 U.S.C. § 1125(a)) and the California Unfair Business Practices Act on the basis that CRA’s marketing campaign constitutes false and misleading advertising for the portrayal of “corn sugar” as natural and the equivalent of cane sugar (or “real sugar” as alleged in the Complaint).

U.S. District Judge Consuelo B. Marshall dismissed the original Complaint against the defendant companies who were merely members of the CRA. The court reasoned that the plaintiffs failed to establish the elements of an agency relationship between the HCFS/corn sugar producing companies and the CRA to hold those member companies directly or vicariously liable for the CRA’s campaign. The claims against the CRA were not dismissed.

Undeterred, the sugar producers filed an amended Complaint re-alleging claims against the CRA and its member companies for violations of Section 43 (a) of the Lanham Act. The new complaint seeks to bolster its validity by arguing that the authority, governance, control and funding of the CRA comes almost exclusively from the collaborative efforts of the defendant member companies. The complaint remains vague on details of the CRA’s specific activities and focuses on the narrative behind the rebranding campaign and the special assessments used to fund the initiative.

Naturally, the defendant member companies have filed another motion to dismiss. They argue that there is well supported case law which provides that membership in a trade organization alone does not constitute sufficient grounds to satisfy the burden of showing principal-agency relationship, “even when its purpose is to promote their interests generally.” They argue that the complaint should be dismissed because it does not and cannot satisfy the plausibility required by FRCP 12(b)(6) nor the particularity of FCRP 9(a). The mere conclusory allegations of agency and conspiracy, along with allegations regarding financial contributions and board participation in the CRA are not enough to support the requisite pleadings standard.

LEFTOVERS

It remains to be seen whether Judge Marshall will conclude that a reasonable inference can be drawn from the organizational framework of the CRA to impose vicarious liability on the member companies for the potential Lanham Act violations. What weight will the Court give, if any, to a member company’s: voting presence on an association’s Board of Directors, the amount and extent of financing, and, in this instance, the approval and control of advertising campaigns? The decision could have wide-ranging implications on the mode in which trade associations organize, interact and serve as surrogates for the interests of their constituents.

Consumers may be more interested in the truth of the matter – whether corn sugar is better, worse, or the equal of cane sugar. The food industry, and other consumer-oriented industries, however, will want to know whether they need to reconsider the extent of their participation in trade associations.

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Posted in False Advertising, Labeling Claims, Sugar Substitutes

Injuries Caused By Contaminated Beef Constitute A Single Occurrence

Posted on May 2, 2012 by Stephanie P. Gantman — No Comments ↓

A food-borne illness outbreak usually results in a large number of claimants and, depending on the scope of distribution of the contaminated product, it can spawn claims in a multitude of jurisdictions. For insurance adjusters and their insureds, a critical question is how to determine the “number of occurrences” in a food contamination claim that results in multiple injuries. Most insurance policies have a “per occurrence” limit, capping an insurer’s exposure arising from a single event. Some insurance policies contain “per occurrence” deductibles, where insureds are responsible for a limited amount of dollar-one coverage for each event. So when an insured places contaminated food in the stream of commerce and hundreds, or potentially thousands of people are injured, the insurer’s and insured’s respective responsibilities can often turn on whether those claims constitute one or multiple occurrences within the meaning of the insurance policy.

A recent decision out of the Northern District of Ohio grapples with these issues. Travelers Prop. Cas. Co. v. RSUI Indem. Co., 2012 U.S. Dist. LEXIS 13847, No. 11-c-0173 (N.D. Ill. Feb. 3, 2012). The coverage dispute arose out of a series of underlying personal injury suits against Valley Meats, Inc. by individuals who became sick after eating ground beef contaminated with the E. coli bacteria, and those who became sick through a secondary infection.

The primary GL insurer, Travelers, acknowledged coverage for the claims and agreed to pay an additional $500,000 above its per occurrence limit, subject to its right to recoup that amount from the excess insurer, RSUI. Travelers filed a declaratory judgment action seeking a declaration that RSUI must reimburse it for the additional $500,000 because the claims involving primary infection claimants and secondary infection claimants constituted a single occurrence such that Travelers had exhausted the primary limit. RSUI argued that its excess policy was not triggered because the incidents arose from two occurrence and Travelers did not properly exhaust per occurrence policy limits.

The court sided with Travelers. Illinois courts follow the “cause” test to determine the number of occurrences, meaning that courts look to the cause of the insured’s liability, and not the resulting injuries. RSUI argued that a time and space element is applicable to the cause test, and the primary and secondary infection claims where not so close in time as to be the result of a single occurrence. The court rejected RSUI’s argument, stating that the time and space considerations are only applicable to ongoing omissions such as an ongoing dangerous condition on a property. In contrast, the court found that this case resulted from discrete negligence, i.e. “the production of a single batch of tainted meat,” so the time and space element was inapplicable. In conclusion, the court stated:

Because the damages for which coverage is sought result from the manufacture and sale of a defective product, the loss emanates from a single cause and there is but one occurrence.

Id. at *10 (internal quotations and citations omitted). Accordingly, Travelers satisfied its per occurrence limit and RSUI was ordered to cover Travelers’ $500,000 excess payment.

What’s the take away from this decision? Specifically, under Illinois law, the manufacture and sale of contaminated food that results in injuries to multiple claimants constitutes a single occurrence. Generally, this decision serves as an example of the importance and complexities involved in determining the number of occurrences. The number of occurrences analysis is both fact specific and jurisdiction specific (not every jurisdiction employs a cause test) so a case-by-case analysis is necessary to determine this critical issue.

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Posted in Insurance Coverage

The Pros and Cons of Minimally Processed Food

Posted on April 24, 2012 by Aaron Krauss — No Comments ↓

On April 11, 2012, Jerry Scott and Jim Borgman managed (in their usual hilarious way) to put their finger on one of the dilemmas facing the food industry when they penned a Zits comic strip showing Pierce grabbing a live chicken during lunch so he could have a fresh egg, while Jeremy contents himself with a sandwich on processed white bread. Jokes aside, we all know that there are people who will go to extremes (as Pierce always does) in the name of “natural” or “organic” food. We also know that there are some (like Jeremy) who think people like Pierce are nuts. So what is a food company to do?

These days, everyone is focused on fresh food. “Natural” is a buzzword. “Processed” is a dirty word. But is processed really dirty? Often, the “process” removes impurities. It also kills germs. It can even add nutrients (how many people drink milk that isn’t fortified with Vitamin D?). How could that be bad? And is “organic” really “natural?” Sometimes it is, but often it isn’t.

Some people (like Pierce) will pay extra for “natural” food. They might even understand that the claimed health benefits – benefits that are not universally accepted – come with some corresponding risks. Look no further than the recent E. coli outbreak associated with raw milk from an Oregon farm and the recent Campylobacter outbreak caused by raw milk originating from a Pennsylvania farm.

Others, like Jeremy, prefer the convenience of processed food.

Neither one is necessarily right. Both are viable markets. It probably doesn’t matter which market you target. But you should make a conscious choice, and know who you are marketing to.

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Posted in Raw Milk

Pink Slime: A Lesson in Crisis Management

Posted on April 15, 2012 by Joseph A. Arnold — No Comments ↓

The term “pink slime” continues to dominate news desks across the country. Public backlash against processors of “lean finely textured beef” has pushed one of the largest ground beef processors in the United States, AFA, into bankruptcy. Other companies such as Beef Products, Inc. (BPI) have halted production and are scrambling to save the business. The devastating effect of the “pink slime” controversy is particularly interesting because the primary issue is not food safety. Some of the most outspoken critics seem less focused on the safety of the product (which many proclaim to be safe), and more on the lack of public disclosure regarding use of lean finely textured beef in the ground beef we consume. In other words, consumers are upset because they didn’t know they (or their children) were consuming something called “pink slime.”

This is the ultimate p.r. nightmare. Crisis management has long been a hot topic in the food and beverage industry. Why? The rather simple explanations: (1) the explosion of social media; (2) the FDA’s improved communication of recalls and the public accessibility to FDA reports and information; (3) a more health-conscious and food-educated public… The list goes on.

Many companies in the food industry do not have a crisis management plan or social media strategy in place, and are forced into reactive mode when bad news goes public. But even for those that do, the “pink slime” campaign is particularly challenging. After all, most companies stand by the safety and quality of their product and are prepared to address the public in a sensible way in response to an isolated contamination event or recall. In those situations, the crisis team is dealing with an identifiable problem. And while a contamination event will have consumer backlash, the prevailing thought is to isolate the problem and restore consumer confidence. But with “pink slime,” there is no isolated event – no outbreak, no contamination event, no bodily injuries. In this case, the meat industry is dealing with raw emotion, unconnected to a specific event that the meat industry can “fix,” i.e. admit to a mistake, recall the product, decontaminate the plant, compensate customers for injuries, issue public apologies and ensure a safer product. Here, BPI and AFA are dealing with a mix of consumer confusion, anger, mistrust, fear and hesitation, whether justified or not. In the words of Malcolm Gladwell, “emotion is contagious.”

So how does the industry respond? There is no right answer, but as you can see from this full page ad (WSJ Ad), BPI is fighting passionately to combat negative public perception. The food and insurance industries would be well-served to monitor the situation closely and use “pink slime” as a case study. A crisis management plan may look good on paper, but its true worth is in the execution. Situations like this provide companies an opportunity to simulate a public relations crisis and put their plan to the test. Put yourself in BPI’s shoes and think about how you would handle the situation. As the old saying goes, failing to plan is planning to fail.

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Posted in Crisis Management, Pink Slime

Consumers’ Inability to Shape Up! Does Not Constitute Bodily Injury

Posted on April 12, 2012 by admin — No Comments ↓

THE SCOOP

On January 30, 2012, a Texas federal judge ordered that Chubb Custom Insurance Company (“Chubb”) had no duty to defend its insured because the claimants in the underlying class action did not allege any “bodily injury” as defined by the policy.

The underlying class action lawsuit involved a diet and nutritional product called Shape Up! that purported to change consumers’ behaviors to enable them to “take control” of their weight. In 2004, those consumers filed suit in the Superior Court of California against the insured, CSA Neutraceuticals GP LLC (collectively, “CSA”) and Dr. Philip C. McGraw (yeah, the Dr. Phil). The plaintiffs, who failed to achieve the desired weight loss, sought recovery for false advertising and deceptive practices pursuant to California’s Consumers Legal Remedies Act and Unfair Competition Law.

THE FOOD FIGHT

CSA requested a defense and indemnity from Chubb under a products-completed operations claims-made policy. Chubb denied coverage on the basis that the plaintiffs did not sustain “bodily injury” as a result of purchasing a diet product that allegedly failed to show results.

CSA proclaimed that the underlying lawsuits were fraudulent and groundless, but it settled the claims for over $10 million. Subsequent to the settlement, CSA continued to demand that Chubb reimburse it for defense costs and the settlement amount. In 2009, CSA sued Chubb for breach of contract and violation of the Texas Insurance Code.

CSA moved for partial summary judgment, arguing that the allegations in the underlying suit alleged “bodily injury” arising out of an “occurrence.” Chubb responded that coverage was not available because the alleged injuries involved solely economic losses. The policy defined “bodily injury” as:

physical injury, sickness or disease sustained by a person including resulting death, humiliation, mental anguish, mental injury or shock at any time.

The judge agreed with Chubb and held that there was no duty to defend. According to the court, even if the claimants alleged mental anguish, there was no associated physical injury, i.e. there was no effect on the physical structure of the claimants’ bodies.

LEFTOVERS

One of the more complex issues emanating from a product-failure claim involves the important distinction between purely economic losses, which generally are not covered under a liability policy, and economic loss because of bodily injury. In rejecting CSA’s argument for coverage, the court emphasized the importance of establishing the basic requirements for coverage. Specifically, the court stated, “failing to achieve weight reduction means the body basically did not change. It does not mean that the body was injured.” Accordingly, the court upheld the policy’s threshold bodily injury requirement.

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Posted in Class Action, False Advertising, Insurance Coverage, Nutritional Supplements

The Pros and Cons of BPA

Posted on April 5, 2012 by Aaron Krauss — No Comments ↓

Despite an outcry by some consumer advocates, the FDA has declined to ban BPA (bisphenol A) in food containers. Interestingly, the FDA refused a ban because opponents didn’t provide enough data to support a rule change. Because the FDA said that the issue merited further study, it is possible that it will reconsider its position in the near future.

Some companies, such as Campbell’s Soup, are trying to phase out BPA on their own. Indeed, Campbell’s is trying to shift away from cans (which use BPA-containing liners), and towards pouches (which don’t). Other companies, such as Coca Cola, are continuing to use BPA.

So what should companies make of this dispute, aside from assuming that class actions will be filed against even more companies if the FDA moves to ban BPA, and that it would be hard to drink carbonated soda through a straw out of a pouch?

First, there are benefits to BPA, namely preventing interactions between canned foods and the cans themselves. Absent a liner, canned food would eventually corrode the can. The result would be food that is contaminated with metal, microbes or both, and cans that leak, all of which is unhealthy. The Grocery Manufacturers Association published a very helpful article discussing this in more detail.

Second, no one wants to do anything harmful. Perhaps more importantly, no one wants to be accused of – or worse yet be perceived as – selling food that doesn’t measure up to everyone’s idea of what is healthy and wholesome, even if that idea isn’t backed up by science. (Pink slime with your burgers, anyone?)

Third, if you are going to make a change, know what you are changing to, and why. If you don’t, you may find yourself jumping out of the frying pan and into the fire.

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Posted in BPA

Peanut Distributor Not Entitled to Coverage Under Accidental Contamination Policy

Posted on March 30, 2012 by Joseph A. Arnold — No Comments ↓

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:

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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Posted in Contamination Policy, Insurance Coverage

Food Safety Act Loosens Standards for Government Seizures

Posted on March 20, 2012 by Joseph A. Arnold — No Comments ↓

THE SCOOP

One of the most significant and talked about provisions of the Food Safety Modernization Act (FSMA) lies in section 206, “Mandatory recall authority,” which grants to the FDA for the first time the ability to mandate recalls. The FDA’s enhanced authority under FSMA, however, does not stop with recall authority. Under section 207, titled “Administrative detention of food,” the FDA may order the detention of “any article of food that is found during an inspection” if the FDA inspector “has reason to believe that such article is adulterated or mis-branded.”

The administrative detention provision resides in the Federal Food, Drug and Cosmetic Act (FFDCA). The FSMA amended the provision to loosen the standards pursuant to which FDA may order detention. Under the FFDCA, food subject to an FDA detention order must remain at its location until the FDA releases the product or the detention order expires. The order is valid for up to 30 days to allow FDA to take appropriate action, such as filing a complaint for a court order to seize the goods. For the relevant statutory language, click here.

Last fall, the FDA began to act under this new authority. On September 30, 2011, U.S. Marshals seized food products held at a Dominquez Foods processing facility in Zillah, Washington. The FDA issued a detention order on September 2 after observing rodent and insect infestation during an inspection. The United States filed a complaint in U.S. District Court on September 29, and the court issued a warrant of arrest on the same day, empowering the Marshals to seize and condemn the products. The second seizure took place on October 17, 2011, as Marshals seized peanuts, flour and rice from an Illinois warehouse owned by food distributor Chetak Chicago. Again, the FDA found extensive evidence of unsanitary conditions due to rodent infestation. More recently, in January 2012, Mill Stream Corp., a food processing company in Maine, destroyed its cold smoked salmon product in response to a detention order issued by the FDA in December prompted by the discovery of listeria monocytogenes during an inspection.

THE GOVERNMENTAL ACTION EXCLUSION

A court-ordered seizure of food products is certainly the exception to the rule, as many food processors and distributors, so we hope, prioritize health and safety and cooperate with the FDA to remedy unsafe conditions. Nevertheless, bad actors are out there, and insurers cannot ignore the fact that an insured may face a government seizure and subsequently present a claim under a property policy for the value of the seized goods.

However, property policies traditionally include a “governmental action” exclusion which excludes from coverage loss or damage caused directly or indirectly by seizure or destruction of property by order of governmental authority. Some courts take a literal approach to the exclusion and require that the governmental body specifically order the seizure or destruction of property, so an insured’s voluntary recall or destruction of product in response to an FDA warning or recommendation may not trigger the exclusion. However, for those companies that fail to take corrective action and results in government seizure, the exclusion would apply to bar coverage. The FDA’s vigilance in weeding out the truly bad actors will take time and additional resources, but this remains an issue that insurers should pay close attention to as the industry changes sparked by FMSA continue to take hold.

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Posted in Food Safety Modernization Act

Burritos Contaminated With Non-Dangerous Bacteria Not Covered By Contamination Policy

Posted on March 13, 2012 by Mark Bartholomaei — No Comments ↓

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.

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Posted in Contamination Policy, Insurance Coverage

Fresh Express’ Recall Policy Does Not Cover Spinach Recall Absent Actual Contamination

Posted on March 6, 2012 by Stephanie P. Gantman — No Comments ↓

THE SCOOP

The food industry will remember 2006 as the year of the North American E. coli outbreak caused by fresh-bagged spinach. The FDA issued the broadest advisory in its history regarding a commodity, advising consumers not to eat bagged spinach and recommending that spinach processors take steps to recall the product. Thereafter, the FDA limited the advisory to spinach grown in certain countries, and ultimately to spinach from certain contaminated ranches identified as the source of the contamination. The initial Alert, however, resulted in a media frenzy and loss of public confidence in the spinach industry, necessitating – in some companies opinions – the complete withdrawal of spinach from the market and the halting of harvesting and processing of spinach products. Not surprisingly, some insurance coverage issues remain unresolved.

THE FOOD FIGHT

In Fresh Express Inc. v. Beazley Syndicate, the California Court of Appeals recently tackled some of these insurance issues. 199 Cal. App. 4^th 1038 (Cal. Ct. App. 6th App. Dist. 2011). Fresh Express Incorporated, the nation’s largest bagged spinach producer, sought coverage under its “TotalRecall+” insurance policy for significant loss of business income arising out of the recall, despite the fact that its product was not contaminated. After Beazley denied Fresh Express’s claim, litigation ensued. At trial, Fresh Express won a $12 million verdict, representing the policy’s limits for accidental contamination coverage.

The California appellate court reversed the trial court ruling in September 2011 and ruled that Beazley had no obligation to provide accidental contamination coverage. Specifically, the court ruled that Fresh Express’s claim for lost profits was not a direct result of an error by Fresh Express and therefore did not constitute an “Insured Event” under the plain language of the policy. the appellate court found no nexus between Fresh Express’s “errors” and the E. coli outbreak/FDA advisory. Simply, the E. coli outbreak was not an insured event.

Fresh Express appealed the decision, but on January 11, 2011, the Supreme Court of California denied Fresh Express’ petition for review.

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Posted in Insurance Coverage