Insurers recently have argued, with some success, that recall policies limit coverage only to recalls of contaminated products that their policyholders can prove actually were contaminated with a dangerous microbe. In Little Lady Foods, Inc. v. Houston Casualty Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011), a food manufacturer recalled its product after testing revealed the presence Listeria. At the time of the recall, the company did not know whether the Listeria present in the product was of a strain that causes bodily injury. After the recall, tests concluded the Listeria was not the strain that could cause such injury. Based on these later tests, a U.S. district judge for the Northern District of Illinois concluded the recall did not trigger the policy’s requirement that the recall resulted from contamination that “may likely result in bodily injury.” This result was despite the fact that the insured’s product had tested positive for Listeria and the company had acted responsibly in recalling its product to prevent causing consumers harm.
At least one court has relied upon Little Lady in denying recall coverage. In Ruiz Food Products v. Catlin Underwriting U.S., Inc., No. 1:11-cv-00889, 2012 WL 4050001 (E.D. Cal. Sept. 13, 2012), the court found a recall would not trigger the accidental contamination requirement in Ruiz Food’s recall policy unless “contamination or impairment is actually present” in the recalled product. If other courts follow the Little Lady and Ruiz Food holdings, recall coverage could afford materially less protection than many policyholders might have expected when they purchased their coverage.
So far though, at least one court has distinguished Little Lady to reject an insurer’s effort to avoid coverage. In Hot Stuff Foods, LLC v. Houston Casualty Co., No. 11-4055, 2012 WL 2675225 (D.S.D. July 5, 2012), a federal district court distinguished Little Lady and rejected the insurer’s attempt to avoid its coverage obligations under a recall policy.
Hot Stuff Foods was a sausage manufacturer with an insurance policy covering it for expenses it incurred in connection with product tampering or product contamination. Due to a packaging error by Hot Stuff, sausages containing MSG were labeled as not containing it. Hot Stuff initiated a Class III recall, which the FDA defines as involving products that likely “will not cause adverse health consequences.” Hot Stuff then turned to its insurer for coverage of the recall-related expenses, contending MSG was a contaminant under the policy’s terms and it could cause bodily injury.
The insurer denied the claim, and, relying on Little Lady, pointed to expert testimony at trial that MSG likely could not cause bodily injury. The court rejected the insurer’s argument, finding that regardless of the recall’s Class III designation, the policy terms providing coverage for a product that “may likely” cause illness would be satisfied if there were any possibility of illness resulting from the ingestion of MSG—not, as the insurer argued, “a probability” of illness. Under this standard, the court determined the recall constituted “accidental contamination” because MSG “may likely result in physical symptoms of bodily injury, sickness or disease or death of any person.”
The Hot Stuff court distinguished Little Lady based on its finding that the undisputed evidence in the case proved MSG might cause injury in at least some instances, whereas the Listeria at issue in Little Lady had no meaningful possibility of causing injury.
While Hot Stuff represents a major win for policyholders facing denials of coverage based on bodily injury requirements in recall policies, it also serves as a reminder that policyholders must be vigilant about their choice of language in food recall policies. Had Little Lady, Ruiz Food, and Hot Stuff procured policies with language that made clear the policies would be triggered by a reasonable belief that contamination could cause bodily injury, all three companies might have avoided costly litigation, and Little Lady and Ruiz Food may have had coverage to pay for some or all of their recall costs.