plrb/lirb 2012 claims conference - food and consumer product recalls

Food & Consumer Product Recalls:Food & Consumer Product Recalls:

An InsurerAn Insurer’’s Perspectives Perspective

Paul Bellin, Royal & SunAlliance Insurance Agency

Bary Gassman Esq., Asperger Associates LLC

Stephen Gregoire CPA/CFF, Meaden & Moore

April 16 & 18, 2012

What Do All These Products Have in Common?What Do All These Products Have in Common?

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Learning ObjectivesLearning Objectives

� Respond to recalls impacting insureds, including claims presented by the insureds' downstream customers

� Take effective steps to protect the insureds' brand and proprietary information

� Protect subrogation rights in recall cases to obtain the best possible recovery outcome

� Evaluate and overcome coverage defenses which are frequently raised by liability insurance providers in recall cases

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Types of RecallsTypes of Recalls• Food & Drug Administration (FDA)

– Class I

– Class II

– Class III

• Consumer Product Safety Commission (CPSC)– Class A

– Class B

– Class C

• United States Department of Agriculture (USDA)– Class I

– Class II

– Class III

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Source: www.fda.gov

Source: www.cpsc.gov

Source: www.fsis.usda.gov

Recall InitiationRecall Initiation

� FDA & USDA recalls are almost always voluntary

◦ Both have the authority to request or enforce recalls

� CPSC recalls are initiated by the manufacturer and are required by law to notify the CPSC upon discovery of a defect

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Recall Notice / Potential DefectRecall Notice / Potential Defect

� Examples of Recall Notices (See Handout)

� Scope of the recall & impact to your insured◦ How many customers?◦ How many products?

� Objective: Manage & limit the exposure

� Assembling your team

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Hypothetical Supply Chain Hypothetical Supply Chain -- FoodFood

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Tomato GrowerPizza Sauce

ManufacturerFrozen Pizza Manufacturer

Wholesale Distributor

Retail OutletConsumer

Where does your Insured fit in?

Claims from 3Claims from 3rdrd PartiesParties

• Where do the claims originate from?

• Initial documentation– Affidavits (See Handout)

– Questionnaires (See Handout)

– Visual Documentation / Sample Retention

• Business relationships– Insured and customers

– Insured and Insurers

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Tips for Managing 3Tips for Managing 3rdrd Party ClaimsParty Claims

� Create a master tracking spreadsheet

� Discuss with the entity originating the claim

◦ Not always the insured’s customer

� Keep your insured in the loop

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Tracking SpreadsheetTracking Spreadsheet

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Tracking SpreadsheetTracking Spreadsheet

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Potential Areas of DamagesPotential Areas of Damages

• Third-Party Claims

– Credits for destroyed or damaged finished goods from customers’ customers

– Recall penalties and fines

– Customers Finished Goods & Disposal Cost

– Labor Cost

– Freight & Storage Fees

– Lost Profits

• Insured’s Claims

– Replacement cost of damaged product

– Extra expense

– Storage & Disposal fees

– Recall assistance

– Lost profits

– Brand/Reputation Rehabilitation

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““Snowball EffectSnowball Effect”” of Damagesof Damages

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Tomato Grower

Pizza Sauce #1

Pizza Sauce #2

$0.50 per lb

Frozen Pizza #1

Frozen Pizza #2

Frozen Pizza #3

Frozen Pizza #4

$1.00 per lb

$1.00 per lb

4 Frozen Pizzas@ $3.00 / Pizza

1 2 3 54

4 Frozen Pizzas@ $3.00 / Pizza

6 7 8 9 10 11 12

Thousands of Retailers

Millions of Consumers

$3.50 / Pizza

$4.50 / Pizza

Sensitive Areas of DisputeSensitive Areas of Dispute

• Incremental vs. allocation of normal costs

• Duplications

• Lost profits / Business Interruption

• Recall related cost

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Disposal of ProductsDisposal of Products

� Salvage

� Brand Protection

� Coordination of disposal

� Creative Solutions

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ConfidentialityConfidentiality

� Examples

� Important Features

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SettlementsSettlements

� Managing Business Relationships

� Compromising Unsubstantiated claims

� Recovery from Upstream Supplier

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FirstFirst--Party CoverageParty Coverage

� PRODUCT WITHDRAWAL/RECALL INSURANCE

� ACCIDENTAL CONTAMINATION, MALICIOUS TAMPERING AND PRODUCT EXTORTION INSURANCE

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Sample Product Withdrawal / Recall Sample Product Withdrawal / Recall

ProvisionProvision

� We will reimburse you for “product withdrawal expenses” incurred by you because of a “product withdrawal” to which this insurance applies.

� Insurance only applies to a “product withdrawal” if it is initiated because:◦ You determine that the “product withdrawal”

is necessary; or◦ A government entity has ordered you to

conduct the “product withdrawal.”

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Source: ISO Properties, Inc

What Expenses are Covered?What Expenses are Covered?

� Can include:◦ Replacing or repairing the defective product;

◦ Notifications or announcements regarding recall;

◦ Shipping the recalled product from the purchaser or user;

◦ Overtime to non-salaried employees;

◦ Hiring of independent contractors and consultants;

◦ For communications such as TV and radio announcements;

◦ Storage and warehouse space;

◦ Disposal costs for “your products” or products that contain “your products”;

◦ In some cases, lost profit resulting from the recall.

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Is it a Covered Recall?Is it a Covered Recall?

� Not all recalls are covered� Terms of the policy will dictate� Examples of recalls that typically are not

covered are those initiated due to:◦ The failure of the product to serve its intended

purpose, including breach of warranty of fitness or performance;◦ Deterioration or decomposition of the product;◦ Expired shelf-life;◦ Known defect prior to time product leaves your

control;◦ Recalls initiated due to copyright or trademark

infringement.

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� Sokol and Co. v. Atlantic Mutual Ins. Co., 430 F.3d 417 (7th Cir. 2005)(Illinois Law)

◦ “Covered Recall” defined by policy as a “recall made necessary because the insured or a government body has determined that a known or suspected defect, deficiency, inadequacy or dangerous condition in ‘your product’ has resulted in or will result in ‘bodily injury’ or ‘property damage.’”

◦ Court interpreted this to mean that coverage was limited to recalls initiated by the insured or a government body.

◦ Coverage did not exist where insured’s customer initiated the removal and replacement of the insured’s product.

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Sample Accidental Sample Accidental

Contamination Provision Contamination Provision

� Reimburses insured for “losses” arising out of Insured Events where the losses are due to: “Accidental Contamination.”

� “Accidental Contamination” defined: Error by the insured in the manufacture, …processing, …packaging of any Insured Products…which causes the Insured to have reasonable cause to believe that the use or consumption of such Insured Products has led to or would lead to:◦ 1) bodily injury, sickness, disease or death of a person

or animal; or◦ 2) physical damage to or destruction of tangible

property.

23Source: ISO Properties, Inc

Covered ExpensesCovered Expenses

� Can include:

◦ Recall Expenses

◦ Product Rehabilitation Costs

◦ Gross Profits

◦ Crisis Response and Consultant Expenses

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Recent Court DecisionsRecent Court Decisions

Fresh Express Inc. v. Beazley Syndicate, 2011 WL 3949805 (Cal.App.6th 2011)

� E. Coli outbreak was not an error by the insured, therefore, no coverage

Caudill Seed & Warehouse Co., Inc. v. Houston Casualty Co., 2011 WL 6370366 (W.D. Ky. 2011)

� No coverage because source of contamination was not the insured’s facility.

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Recent Court Decisions (contRecent Court Decisions (cont’’d)d)

Little Lady Foods v. Houston Casualty, 2011 WL 4473517 (ND ILL 2011)

� Insured’s belief that product might contain a harmful strain of bacteria not enough to establish coverage. Policy does not cover costs for contamination prevention.

The Limited v. Cigna Ins. Co., 228 F.Supp.2d 574 (E.D.Pa. 2001) (Affirmed on Appeal)

� No coverage existed where insured could not prove actual contamination of the product, despite FDA agreement with recall.

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Recovering Against Upstream Recovering Against Upstream

Manufacturers and SuppliersManufacturers and Suppliers

� Theories of Liability-

◦ Breach of Contract

◦ Breach of Warranty

◦ Negligence

◦ Strict Product Liability

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Breach of ContractBreach of Contract

� Is there a written contract between insured and manufacturer or supplier?

� Possible terms regarding product quality and types of damages recoverable

� Examine purchase orders – acceptance of order constitutes acceptance of purchaser’s terms

� Terms may include an indemnification clause, or confirm the types of recoverable damages

� Beware of limitations written into contracts

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Breach of WarrantyBreach of Warranty

Two Forms:

� Express –◦ Supplier expressly guarantees that a product is

not defective, or will perform in a certain way

� Implied-◦ Operates by law, even in absence of express

warranty◦ Commonly found in Uniform Commercial Code

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Uniform Commercial CodeUniform Commercial Code

� Implied Warranty of Merchantability◦ To be merchantable, goods must, among

other things:� Pass without objection in the trade;

� Be of fair average quality

� Be fit for ordinary purpose for which the goods are used (i.e., food must be fit for consumption)

� Implied Warranty of Fitness for Particular Purpose

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HypotheticalHypothetical

� Insured purchased a component for one of its products through a distributer, or middleman.

� Component later recalled by the company that made it, causing insured to sustain extensive damages while implementing its own recall.

� Can insured recover under breach of implied warranty theory against manufacturer?

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NegligenceNegligence

� Duty

� Breach of duty

� Causation

� Damages

� Must prove negligent acts and that the negligent acts caused damages

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Strict Product LiabilityStrict Product Liability

� Look to the statutory requirements in forum state

� Typically:◦ Product is defective (manufacturing, design, inadequate

warnings)

◦ Defective condition made product “unreasonably dangerous”

◦ Defective condition existed when it left the manufacturer’s control

◦ Product reached the user without substantial change

◦ Defective condition caused the damages

� Eliminates the requirement of proving specific acts of negligence

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Defenses to Tort ClaimsDefenses to Tort Claims

� Economic Loss Doctrine

◦ One of the most common defenses to tort-based product liability claims

◦ Court-created legal doctrine exists in one form or another in most jurisdictions

� Application varies from state to state

� Primary exceptions to application-

◦ Where the product defect causes bodily injury

◦ Where the product defect causes damage to property other than the product itself

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CompareCompare

� Wausau Tile, Inc. v. County Concrete Corp., 593 N.W.2d 445 (Wisconsin 1999)

◦ Integrated system test

◦ Expectations of the parties

� Travelers v. Damman & Co., 594 F.3d 238 (3d Cir. 2010)(NJ)

◦ Sophisticated companies should protect themselves through contract remedies

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Upstream Recoveries Against Upstream Recoveries Against

CGL PoliciesCGL Policies

� CGL policy typically provides:◦ Insurer “will pay those sums that the insured

becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which the insurance applies.”

� Only applies if:◦ “The ‘bodily injury’ or ‘property damage’ is

caused by an ‘occurrence’ that takes place in the ‘coverage territory.”


Common Policy DefensesCommon Policy Defenses

� No “Occurrence”

� No “Property Damage”

� Damage to “Your Product” Exclusion

� Damage to “Impaired Property/Property Not Physically Injured” Exclusion

� “Recall of Products, Work or Impaired Property” Exclusion

� “Contractual Liability” Exclusion

� “Communicable Disease” Exclusion

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““OccurrenceOccurrence”” IssuesIssues

� “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.


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Was There an Was There an ““OccurrenceOccurrence””??United National Ins. v. Faure Bros., 949 N.E.2d 1185

(Illinois 2009)o Mislabeled Chemical Bottles: Inquiry is not whether the acts were

performed intentionally, but whether the injury was expected or intended.

Amerisure Mut. Ins. V. Hall Steel Co., 2009 WL 4724303 (Michigan 2009)o Steel Wiper Brackets: When defective part is incorporated into

larger product which causes the product to become useless, damages are caused by an “accident.”

Travelers v. Damman & Co., 2008 WL 370914 (NJ 2008)o Vanilla Beans: Distinguish between purely contract damages and

tort-related damages.

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How Many How Many ““OccurrencesOccurrences””??

� Why is this important?

� Three schools of thought:

◦ Each individual claimant’s injury is an occurrence;

◦ The manufacture/sale of defective products constitutes an occurrence – see in cases where products contain asbestos;

◦ Where many individuals injured through exposure at same time & place, there is one occurrence.

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Republic Underwriters Ins. v. Moore, 2010 WL 4365566 (ND Oklahoma)

◦ Restaurant/Catering: Acts constituting the “occurrence” must fall within same temporal & spatial parameters.

Bausch & Lomb, Inc. v. Lexington Ins., 414 Fed. Appx. 366 (2d Circuit 2011)

◦ Contact Lens Solution: Incident giving rise to liability is the claimants’ exposure to the product, not the insured’s sale of the product.

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Where Was the Where Was the ““OccurrenceOccurrence””??

ACE American Ins. Co. v. RC2 Corp., 600 F.3d 763 (7th Circuit 2010)

◦ Lead in “Thomas the Train” toys.

◦ The “cause theory” not applied to determine where an “occurrence” takes place.

◦ “Occurrence” that triggers coverage takes place where the actual event that inflicts the harm takes place.

No No ““Property DamageProperty Damage””

� “Property Damage” means:

◦ Physical injury to tangible property, including all resulting loss of use of that property.

or

◦ Loss of use of tangible property that is not physically injured.


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� Hamilton Die Cast v. U.S. Fidelity & Guaranty, 508 F.2d 417 (7th Cir. 1975)◦ Tennis Racket Frames: Where no physical harm

to other parts of finished goods, no “property damage” exists.

� Aetna Life & Cas. v. Patrick Industries, 645 N.E.2d 656 (Ind. 1995)◦ Camper Furniture: “Property damage” requires

more than mere diminution in value; need physical injury.

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Contrast with…

� Imperial Cas. & Indemnity v. High Concrete Structures, 858 F.2d 128 (3d Cir. 1988)

◦ Steel Washers: Where product is made into something new with greater value than the product supplied by the insured, damage was to more than just the insured’s product.

� Shade Foods v. Innovative Product Sales, 78 Cal.App.4th 847 (Cal. 2000)

◦ Almonds: “Property damage” exists “where a potentially injurious material in a product causes loss to other product with which it is incorporated.”

Damage to Your ProductDamage to Your Product

� “Property damage” to “your product”arising out of it or any part of it.

� “Your product” means:

◦ a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

� (1) You;

� (2) Others trading under your name; or

� (3) A person or organization whose business or assets you have acquired….


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� Tradin Organics USA v. Maryland Cas. Co., 325 Fed.Appx. 10 (2d Cir. 2009)

◦ “Intended to exclude coverage for damage to the insured’s product, but not for damage caused by the insured’s product to…property other than the insured’s own product.”

Damage to Impaired Property/ Damage to Impaired Property/

Property Not Physically InjuredProperty Not Physically Injured

This insurance does not apply to:

� “Property damage” to “impaired property” or property that has not been physically injured, arising out of:

� A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work.”


� “Impaired property” means tangible property, other than “your product” or “your work”, that cannot be used or is less useful because:

◦ It incorporates “your product” or “your work”that is known or is thought to be defective, deficient, inadequate or dangerous;

� If such property can be restored to use by the repair, replacement, adjustment or removal of “your product” or “your work”…

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� Sokol & Co. v. Atlantic Mutual Ins. Co., 430 F.3d 417 (7th Cir. 2005)

◦ Removal and replacement of rancid peanut paste packets subject to impaired property exclusion.

Recall of Products, Work or Recall of Products, Work or

Impaired PropertyImpaired Property� The “Sistership” exclusion

� Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:◦ “Your product”◦ “Your work”; or◦ “Impaired property”;

� If such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.


Forest City Dillon, Inc. v. Aetna Cas. & Surety, 852 F.2d 168 (6th Cir. 1988)

◦ “[W]hile [the insurers] intended to pay for damages caused by a product that failed, they did not intend to pay for the costs of recalling products containing a similar defect that had not yet failed.”

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Contractual LiabilityContractual Liability

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� “Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:◦ That the insured would have in the absence of the

contract or agreement; or

◦ Assumed in a contract or agreement that is an “insured contract”, provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement…


Communicable DiseaseCommunicable Disease

� Exclusion typically provides:

◦ This insurance does not apply to bodily injury or property damage arising out of the transmission or alleged transmission of any communicable disease.


� Upheld in cases involving food. See Burlington Ins. Co. v. Kloesel’s Steakhouse and Bar, S.D. Texas, Civil Action V-98-100 (Hepatitis A).

� Other cases discussing exclusion:

◦ Koegler v. Liberty Mut. Ins. Co., 623 F.Supp.2d 481 (N.Y. 2009)(humanpapillomavirus)

◦ Alexis v. Southwood Ltd. Partnership, 792 So.2d 100 (La. 2001)(exposure to contaminated soil, air & water)

� All have in common: Plaintiff became ill or contracted a disease

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Does It Apply If Nobody Gets Sick?Does It Apply If Nobody Gets Sick?

� Assume the following facts:◦ A raw ingredient producer sells dried milk products to its

commercial customers which are later recalled because they are contaminated with a harmful strain of Listeria.

◦ Customers assert claims alleging damage to their finished goods, disposal costs, and other charges relating to their own recalls of products.

◦ Ingredient producer seeks coverage for customer claims.

� Would you deny coverage pursuant to the Communicable Disease exclusion?

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� Exclusion recently tested in different venues in the context of food recall claims where only property damage was asserted. See also Camden Fire Ins. Ass’n v. Mincing Trading Corp., New Jersey.

� Policies typically do not define the terms “communicable disease” or “transmission”leaving those to be interpreted by the court.

� Overcoming the exclusion

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Impact of Large Scale RecallsImpact of Large Scale Recalls

� “Snowball” effect causing massive losses downstream

� Manufacturers:

◦ Financially incapable of responding to claims

◦ Must respond to lawsuits across the U.S.

◦ Face bankruptcy and liquidation

� Insurers:

◦ Defense costs

◦ Uncertain coverage determination

◦ Potential bad faith claims

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Recent Approach to ResolutionRecent Approach to Resolution

Plainview Milk Products Cooperative Case

� 2009: recall of various milk products sold to commercial customers due to potential Salmonella contamination.

◦ 21 direct customers and 189 downstream customers impacted

� Multiple lawsuits were initiated around the country.

� Claims totaling more than $31,000,000.

� CGL policy provided coverage of $500k per occurrence & $2M aggregate. Excess policy with $5M limit.

� Insurer defended but denied indemnity based on recall exclusion, impaired property exclusion, and pollution exclusion; also claimed that only one policy year implicated.

� Defendants, insurers and claimants all came to the table in one setting.

� 85% of the total claims asserted against Plainview were resolved within the policy limits and without forcing Plainview into bankruptcy.

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Questions?Questions?

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The presentation materials are for information purposes only and are not intended to provided legal or accounting advice. Because every case is different, you should obtain

case specific legal and accounting advice from your own attorneys and consultants.

plrb/lirb 2012 claims conference - food and consumer product recalls

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