A ‘Victim’s’ View of Insurer’s Liability in Peanut Product Recall Case

The story of the salmonella-tainted peanut products distributed by Peanut Corp. of America (PCA) is one of the highest-profile food recall cases in recent memory, and one that holds interesting side stories for the insurance industry.

One of the most interesting stories may be what the courts will say now that the company’s liability insurer – The Hartford – has sued PCA to limit its liability from the outbreak.

There are three reasons for my interest in Hartford’s suit: 1.) such a pre-emptive strike by an insurance carrier is rare; 2.) I’m curious to see what legal theories and policy boundaries Hartford will ask the court to establish; and 3.) I was “hit” by salmonella-laced peanut butter myself.

Although I’m not planning to sue, I am pre-occupied with Hartford’s move. Hartford may try to limit or deny coverage by asserting PCA’s actions were intentional and/or illegal; limiting coverage by using a “Batch Clause” or condition (if one exists); or limiting or defining coverage by establishing the jurisdictional definition of an “occurrence.”

PCA’s products may have caused at least eight deaths, according to The Associated Press, and triggered one of the largest product recalls in history. The case has raised questions of who knew what and when. Did anyone with authority know about the tainted products? Were they aware but apathetic to the potential for injury? Was there a conspiracy to hide the truth or any other intentional actions? “Yes,” seems to be the answer to each of these.

Federal Food and Drug Administration (FDA) officials report that Lynchburg, Va. – based PCA knowingly shipped tainted products from its Blakely, Ga. plant. Emails from PCA’s president reportedly instructed plant managers to send out tainted peanuts regardless of the risk in order to limit the lost revenue. The FBI has joined the investigation.

If the processing, shipping and selling of the salmonella-tainted products were intentional or, worse, criminal, how might the insurance policy respond? The answer revolves around the definition of an “occurrence,” the application of the expected or intentional injury exclusion, and, more broadly, the concept of legal liability in relation to insurance protection.

Insurance Services Office’s (ISO) commercial general liability policy defines “occurrence” as: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Does shipping products known to be or at least suspected of being tainted qualify as an “accident?” Even if an act qualifies as an “accident,” does the CGL protect the insured knowingly committing an illegal act?

“Accident” is not defined in the CGL. Merriam-Webster’s Dictionary of Law defines “accident” in part as: “an unexpected, usually sudden event that occurs without intent or volition although sometimes through carelessness, unawareness, ignorance or a combination of causes.”

FDA officials purport to have evidence that PCA acted in reckless disregard for the health and safety of consumers by shipping salmonella-tainted products under orders from its president. If PCA did, in fact, knowingly ship tainted products, any injuries were not caused by an “accident” and thus do not qualify as “occurrences” under the CGL provisions. Hartford can deny coverage.

Hartford’s second bullet is the CGL’s Expected or Intended Injury exclusion. Certainly PCA didn’t “intend” to injury anyone as evidenced by a June 2008 email sent by the company president: “I go through this about once a week, I will hold my breath – again.” It’s logical to assume PCA should or could have “expected” injury to occur.

Salmonella is proven to cause sickness and even death. Any entity that knowingly sends tainted product out for mass consumption should “expect” some injury or death to occur. Again, Hartford may be within the policy provisions to deny PCA’s claims.

There is little doubt that PCA is legally liable for any injuries. Hartford apparently wants to establish, upfront, the extent of its liability. If Hartford’s policy provisions are similar to ISO’s, Hartford may owe no duty to defend or indemnify PCA for any injuries or damages.

A “batch clause” serves to limit all product liability claims arising out of one production run – a batch – subject to one per occurrence limit. If 300 people are sickened by one “batch,” those 300 are considered part of one occurrence. However defining a “batch” may be difficult as it appears PCA’s distribution of tainted peanuts could go back to 2006. I think defining a “batch” is the least likely of the three options Hartford might pursue.

Courts use four legal theories to decide when bodily injury or property damage occurs: Injury-in-Fact, Manifestation, Exposure or Continuous Trigger. Hartford likely wants the court to direct which theory of occurrence applies. There is evidence that PCA knew about the presence of salmonella as far back as 2006; ISO’s CGL states that it will only pay for “bodily injury” or “property damage” that occurs during the policy period. It also will not pay for an injury known by the insured to have occurred prior to the policy period.

Hartford wants to limit the dates of occurrence to as few policy periods as possible to lower its potential liability. Also, since the umbrella will likely be called upon, Hartford would probably like to keep the current policy out as it provides the highest total limits.

Hartford has not made its legal plans public, but this discussion may answer questions some have into how an insurer could possibly deny or limit coverage.

Topics Carriers