Minnesota's 'Impairment Of Function And Value' Test Determines Whether Recalled Food Constitutes Property Damage

We often associate food recalls with harmful and contaminated products but manufacturers actually issue recalls for a variety of reasons. Companies sometimes issue recalls because of suspected, but not confirmed, contamination or other quality control issues. Other times, they issue recalls because a regulatory agency disapproves of certain ingredients. When recalls occur without confirmed contamination, food companies and their insurers often debate whether the recalled item suffers "property damage" as defined by the policy.

Consider, for instance, the recent decision in Netherlands Ins. Co. v. Main St. Ingredients, LLC, 2013 U.S. Dist. LEXIS 2685 (D. Minn. Jan. 8, 2013). In 2007, Main Street Ingredients ("MSI") purchased instant milk from Plainview Milk Products Cooperative ("Plainview") and resold it to Malt-O-Meal ("MOM") for incorporation into MOM's instant oatmeal. The FDA detected unsanitary conditions and salmonella at Plainview's manufacturing facility in 2009, prompting Plainview's recall of products dating back to 2007. This forced MOM to recall its instant oatmeal even though no contamination or salmonella were ever detected in the milk supplied by MSI. MOM sued MSI seeking damages related to its oatmeal recall including recovery for destroyed inventory, credits and fees to customers, and recall freight.

MSI tendered the complaint to its liability insurer, Netherlands, which agreed to defend subject to a reservation of rights. After the underlying claim settled for $1.4 million, Netherlands filed a declaratory judgment action against MSI.

On cross-motions for summary judgment, the court ruled in favor of MSI, finding that MOM's complaint alleged covered property damage because the inability to lawfully distribute products due to an FDA regulation constitutes an "impairment of function and value." The court also ruled that the "your product," "product recall," and "impaired property" exclusions did not apply.

The Inability to Distribute Adulterated Oatmeal Constitutes Property Damage

The Minnesota district court determined that MOM's inability to lawfully distribute its instant oatmeal constituted "property damage" under MSI's policy. In so doing, the court relied on Minnesota precedent in General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) (as applied in the CGL context in United Sugars Corp. v. St. Paul Fire & Marine Ins. Co., No. A06-1933, 2007 WL 1816412 (Minn. Ct. App. June 26, 2007))...