Why it matters

The question of coverage for costs relating to a voluntary recall of breakfast sandwiches should be decided by a jury, the Eighth U.S. Circuit Court of Appeals has ruled. When a federally regulated flavor enhancer was inadvertently added to the sausage of an insured’s breakfast sandwiches and sold without the required label disclosure, the company was forced to undertake a recall. The company then sought coverage for its recall costs. The insurer balked, arguing that the voluntary recall of roughly 200,000 cases of sandwiches did not trigger coverage because it did not constitute “accidental product contamination.” Reversing summary judgment for the insured, the federal appellate panel said the government reports, scientific studies, and contrary expert opinions presented by the parties needed to be considered by a jury. The Eighth Circuit remanded the case for a jury to determine whether the consumption of the sandwich with between 0.06 and 0.13 grams of monosodium glutamate would likely result in bodily injury, sickness, or disease in customers.

Detailed Discussion

A manufacturer and seller of consumer food products, Hot Stuff Foods sells two types of sausage. For breakfast sandwiches, Hot Stuff uses a sausage that does not contain monosodium glutamate (MSG); for sausage distributed separately, the company uses a product that contains MSG.

Federal law requires that MSG be disclosed on a food product label when it is an added ingredient. When Hot Stuff realized that MSG-containing sausage was inadvertently used in its breakfast sandwiches, the company immediately contacted the Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA).

After discussing the problem with both agencies, Hot Stuff conducted a voluntary recall of the mislabeled sandwiches that were in violation of federal law because they did not disclose the added MSG. More than 193,000 cases of breakfast sandwiches were recalled.

To cover the losses sustained due to the recall, Hot Stuff sought indemnification from Houston Casualty Company pursuant to a Malicious Product Tampering/Accidental Product Contamination policy. Houston denied the claim on the grounds that it did not involve an “Accidental Product Contamination” as defined in the policy.

The policy defined the term as “(1) any accidental or unintentional contamination, impairment or mislabeling … during the manufacture … labeling … production or processing … of the Named Insured’s PRODUCTS (including their ingredients or components), or PUBLICITY implying such, or (2) fault in design specification or performance … provided always that the consumption or use of the Named Insured’s CONTAMINATED PRODUCT(S) has, within 120 days of such consumption or use, either resulted, or may likely result, in (1) physical symptoms of bodily injury, sickness or disease or death of any person(s) and/or (2) physical damage to (or destruction of) tangible property ….”

Hot Stuff sued Houston, and a federal court in South Dakota granted the insured summary judgment on the coverage issue. After a four-day trial on damages, a jury awarded Hot Stuff $200,000 for lost gross profit and $755,268.07 for recall and crisis response expenses.

On appeal, the Eighth U.S. Circuit Court of Appeals reversed the summary judgment determination.

Hot Stuff contended that it only needed to show a possibility that consumption of one or more breakfast sandwiches containing the amount of MSG would cause physical injury or illness, while Houston told the court that Hot Stuff had to show a probability that such harm would result.

The real question was somewhere in between, according to the appellate panel.

“[T]he parties to this insurance contract fixed where in the range of product contamination risks coverage should end by choosing a term requiring more than a possibility of physical injury (“may”), but less than a probability (“likely”),” the court said. “The issue is whether the presence of 0.06 to 0.13 grams of undisclosed MSG in the Sausage Breakfast Sandwiches that Hot Stuff distributed and then recalled ‘resulted, or may likely result in’ physical symptoms of injury or illness in any of the persons who consumed those products.”

Both sides presented reports by immunology experts, government reports, and scientific studies. Hot Stuff’s expert stated that certain sensitive individuals have been shown to experience reactions from levels of MSG as low as 0.5 grams; Houston’s expert concluded that the sandwiches were unlikely to result in illness to any person.

A jury must resolve the dispute, the court ruled.

“In our view, whether consumption of the mislabeled Sausage Breakfast Sandwiches ‘may likely result’ in physical symptoms of sickness or disease is a genuine dispute of material fact that cannot be answered by a summary judgment record that consist of inconclusive government reports and scientific studies and the dueling opinions of experts far removed from the relevant marketplace,” the panel wrote.

The court reversed summary judgment for Hot Stuff on the coverage question but upheld the jury award on damages, finding the issue distinct and separable.

To read the opinion in Hot Stuff Foods, LLC v. Houston Casualty Company, click here.