PRACTICAL POLICYHOLDER ADVICE
Insurance coverage for loss arising from a voluntary food product recall is often contingent upon the extent to which the recalled product creates a public health risk. The U.S. Court of Appeals for the Eighth Circuit recently addressed the level of risk required to support coverage, holding that an Accidental Product Contamination policy required more than a possibility, but less than a probability, that the recalled mislabeled food product would cause physical symptoms of bodily injury, sickness, disease or death. Policyholders should be aware that this standard may lead to a jury question, which may encourage settlement in coverage disputes but also may be a reason to reevaluate and clarify policy language. The Eighth Circuit’s decision also provides helpful guidance to policyholders seeking to calculate and prove lost gross profits relating to a product recall.
In a recent decision, the U.S. Court of Appeals for the Eighth Circuit interpreted the terms “may likely result” in an Accidental Product Contamination policy to cover the insured’s voluntary recall of a mislabeled food product, which had not caused any reported illnesses, only if there was more than a possibility, but less than a probability, that the mislabeled product would cause physical symptoms of bodily injury, sickness, disease or death. Hot Stuff Foods, LLC v. Houston Cas. Co., __ F.3d __, 2014 WL 6239254, at *3 (8th Cir. 2014). The court further held that there was a jury question, in light of conflicting expert and other evidence, as to whether consumption of the mislabeled product met this standard. Id. at *5. Despite finding a jury question on the coverage issue, the court held damages need not be retried and affirmed the district court’s denial of the insurer’s motion for judgment as a matter of law as to the amount of the jury’s award of lost gross profit to the policyholder. Id. at *6-7.
The case involved the inadvertent addition of monosodium glutamate (MSG), a flavor enhancer, in the sausage contained in Hot Stuff Foods’ Sausage Breakfast Sandwiches. The product labels did not disclose that the sandwiches contained MSG. As a result, the sandwiches were misbranded under federal law, which required that the product label disclose the addition of MSG. Hot Stuff Foods subsequently informed the appropriate federal agencies and conducted a voluntary recall of the mislabeled sandwiches.
In the subsequent insurance coverage dispute, Hot Stuff Foods sought coverage for its losses arising from the recall pursuant to a Malicious Product Tampering/Accidental Product Contamination policy issued by Houston Casualty Company (HCC). The HCC policy defined “Accidental Product Contamination” to include unintentional mislabeling of Hot Stuff Foods’ products but only if the consumption or use of the product “has, within 12 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.” Id. at *1. On cross motions for summary judgment, the parties disputed whether the sandwiches “may likely result” in physical symptoms of bodily injury, sickness or disease.
The district court ruled that the terms “may” and “likely” in “may likely result” negated each other and meant that there was a chance that an illness or sickness will result. Alternatively, the district court ruled that “may” and “likely” conflicted, rendering “may likely result” ambiguous. Applying South Dakota law, the district court applied the ambiguity in favor of Hot Stuff Foods and held that Hot Stuff Foods need only show “a possibility or a slight chance” that a sickness would result from ingestion of the MSG sandwiches. The district court found that Hot Stuff Foods met this standard by presenting sufficient expert evidence that MSG could cause sickness in at least one person exposed to the mislabeled sandwich. Id. at *2.
The Eighth Circuit rejected the district court’s “one person” test, holding that the district court misinterpreted “may likely result” by reading the term “likely” out of the policy, “contrary to the basic principle that insurance policies, like other contracts, should not be interpreted in a manner that renders any words meaningless.” Id. at *3. Instead, the court found that the terms were not ambiguous, though they may be difficult to apply in ambiguous fact situations. Id. The court considered that the purpose of Accidental Product Contamination coverage is to insure recall incidents that have a relationship with public health hazards, and not to cover all voluntary recalls. Id. The court held that “may likely result” required the product contamination risk to be more than a possibility of physical injury (“may”) but less than a probability (“likely”), comparable to the standard of “reasonably likely to result.” Id. Upon review of the record, which consisted of conflicting expert reports and inconclusive government reports and scientific studies, the court held that there was a genuine dispute of material fact precluding summary judgment as to whether the mislabeled sandwiches “may likely result” in physical symptoms of sickness or disease. Id. at *5.
Separately, the Eighth Circuit upheld the district court’s decision to deny HCC’s motion for judgment as a matter of law as to the jury’s award of lost gross profit to Hot Stuff Foods. Id. at *6-7. The HCC policy defined “gross profit” to require that projected revenue be lost “solely and directly as a result” of the Accidental Product Contamination. Id. at *6. Hot Stuff Foods presented testimony of two regional sales managers that all employees needed to assist with the recall, preventing the company from adequately marketing at important trade shows, which led to reduced sales. The court affirmed the denial of HCC’s motion, finding that the jury had sufficient evidence to find a direct causal connection. Id. at *7.