Watch The Coverage Gap

Originally published by Metropolitan Corporate Counsel, April 2015

Many aspects of a food manufacturer's business are predictable or planned. And then there's food contamination and product recall - unanticipated events that keep a general counsel up at night. No wonder. An outbreak of foodborne illness, linked to a product - even mistakenly, for a short time, or unconfirmed - can have devastating, if not fatal, effects on a company and its brand.

Often, all entities along a product's chain of distribution are impacted by a product recall. In Netherlands Insurance Company v. Main St. Ingredients, LLC, an insurance coverage dispute resulted from the recall of non-fat dried milk ("NFDM") produced by Plainview Milk Products Cooperative ("Plainview"). Case No. 11-533, 2013 U.S. Dist. LEXIS 2685 (D. Minn. Jan. 8, 2013) ("Netherlands"), aff 'd 745 F.3d 909 (8th Cir. 2014). Plainview sold NFDM to Main Street Ingredients, and resold NFDM to American Cereal Corporation, which incorporated the product into instant oatmeal branded under the Malt-O-Meal ("MOM") label. Plainview and MOM initiated recalls after the FDA detected insanitary conditions and salmonella at Plainview's plant, although there was no showing that Main Street's NFDM was contaminated with salmonella.

Even after an FDA recall, the insurance company denied coverage, in part claiming the NFDM did not suffer "property damage." The Eighth Circuit affirmed the district court's finding of property damage even though no factual finding was made as to whether the NFDM or instant oatmeal contained salmonella. The Eight Circuit reasoned, "because the dried milk was 'prepared, packed, or held under insanitary conditions whereby it may have become contaminated with filth, or whereby it may have been rendered injurious to health,' and was therefore 'adulterated,' . . . whether or not it contained Salmonella, so too was the instant oatmeal." Id. at *16-17. Additionally, the court reasoned that after the FDA determined that insanitary conditions existed at the Plainview plant and Plainview issued a voluntary recall, "whether or not [MOM's instant oatmeal] could be safely consumed, the instant oatmeal could not be sold 'lawfully,' 'with an assurance that [it] meet[s] certain regulatory standards.'" Id. at *17 (alterations in original). The Eighth Circuit further held that the insurance policy covered Main Street's loss and that no exclusions applied. This specific recall led to significant litigation, invoking numerous insurance companies' obligations to various entities along NFDM's chain of distribution.

The same NFDM product recall was at issue in Wornick Co. v. Houston Cas. Co., No. 1:11-cv-00391, 2013 U.S. Dist. LEXIS 62465 (S.D. Ohio May...