Product Contamination Insurance: South Dakota district court finds ambiguity in policy's "may likely" language

    Hot Stuff Foods v. Houston Casualty Co., a recent decision out of federal court in South Dakota, highlights the importance of the "trigger" language in these types of product recall policies. At issue in the case was how to interpret the policy's definition of "accidental product contamination." Like most cases in this area, the parties disputed what conditions were necessary to trigger policy coverage. Specifically, the parties offered differing interpretations of the policy's definition of a contaminant as something that "may likely result" in physical symptoms or property damage. In the end, the court was persuaded by Hot Stuff's argument that "may likely" only required showing that the contaminant could possibly cause harm, not that it probably would.

    In January 2011, Hot Stuff discovered that they had been distributing sausage and breakfast sandwiches containing MSG without adequate labeling for nearly half a year. After notifying FDA of their error they were advised to initiate a Class III recall, which FDA defines as one "where the use of the product will not cause adverse health consequences." Hot Stuff notified their insurer, Houston Casualty Co. ("HCC") of the recall and of their intent to make a claim under their policy. After HCC denied the claim, Hot Stuff filed an action seeking declaratory judgment of coverage and alleging breach of contract. Hot Stuff then moved for partial summary judgment on the issue of liability.

    The district court found the "may likely" language used in the policy to be potentially problematic. Under a plain language analysis, "may" means something is possible whereas ‘likely' means it is probable. "When read in conjunction these words essentially balance each other out and leave the impression that ‘may likely' means that there is a chance that an illness or sickness will result." Thus, the court concluded that "…both experts' acknowledgment that rare subjects or sensitive people have experienced some physical symptoms as a result of exposure to MSG is sufficient support to show that physical symptoms of sickness ‘may likely occur' in any person, which satisfies the policy's definition of an accidental product contamination." (emphasis added) The classification of the recall as one that would not cause adverse health consequences was not considered relevant to the court's inquiry. In the alternative, the court said that "may likely" is ambiguous as to the probability or possibility that harm will result because "[t]hese seemingly conflicting words cannot be read in harmony." Under this analysis, the court adopted the reading that was more favorable to Hot Stuff, consistent with contract principles that require ambiguity to be resolved against the drafter of the instrument.

    The decision is noteworthy given the increasing risk of recall for manufacturers. Under the new Food Safety and Modernization Act, which was signed into law in January 2011, FDA now has the authority to mandate recalls. At the same time, globalization has increased the technological complexity of detecting problems and implementing recall plans. As a result substantial uncertainty exists about potential recall liability and companies are likely to seek coverage for these risks. Yet, recall insurance policies do not generally cover prophylactic recalls. Even companies with coverage often struggle to determine whether to initiate a recall: Should they initiate an action based on mere suspicion of contamination or await hard evidence to ensure insurance coverage?

If you need assistance with your insurance program, whether it is coverage questions or recovery after a claim, please contact Art Garrett at garrett@khlaw.com or (202) 434-4248.