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Federal Court in Minnesota Finds Coverage Under CGL Policy in Product-Recall Case

January 8, 2013

The Netherlands Ins. Co. v. Main Street Ingredients, LLC, No. 11—533, 2013 WL 101876 (D. Minn. Jan. 8, 2013)


A Minnesota federal court found there was coverage under a commercial general liability policy for damages related to the recall of instant milk used in a popular brand of instant oatmeal. 


In 2007, Defendant Main Street Ingredients, LLC (“Main Street”) purchased instant milk from Plainview Milk Products Cooperative (“Plainview”) and resold the milk to America Cereal Corporation, a subsidiary of Malt-O-Meal Company (“Malt-O-Meal”), to be used in its instant oatmeal. In 2009, the Food and Drug Administration (“FDA”) detected unsanitary conditions and salmonella at Plainview’s manufacturing facility. Plainview then issued a recall of all instant milk dating back to 2007, which included the milk Main Street had purchased and then sold to Malt-O-Meal. As a result, Main Street forwarded the notice to Malt-O-Meal in June of 2009, and Malt-O-Meal initiated a recall of its instant oatmeal. Subsequently, Malt-O-Meal filed suit against Main Street and Plainview seeking damages resulting from the recall. Main Street notified its insurance carrier, The Netherlands Insurance Company (“Netherlands”), of the action. Netherlands agreed to defend Main Street in the action but reserved the right to deny coverage.

Main Street and Malt-O-Meal settled the suit for $1.4 million. Prior to the settlement, Netherlands filed this action, seeking a declaration that it had no duty to defend or indemnify Main Street. Main Street counterclaimed seeking a declaration that Netherlands was obligated to defend and indemnify. Both parties moved for summary judgment. Because Main Street established a prima facie case for coverage, and Netherlands failed to establish that a policy exclusion applied, the court ruled in favor of the insured.
The commercial general liability policy (the “Policy”) at issue provided that Netherlands “will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or ‘property damage’ to which this insurance applies.” The Policy further provided that Netherlands “will have the right and duty to defend the insured against any suit seeking those damages.” Under the terms of the Policy, in order to establish coverage, Main Street had to demonstrate the following: (1) an occurrence; (2) the loss was not known prior to the policy period; and (3) property damage.


The court found that the recall of the contaminated instant milk qualified as an “occurrence” because there was no evidence suggesting the insured intended to injure Malt-O-Meal. The Policy defined an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court, applying Minnesota law, interpreted “accident” in this context to mean “an unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.” The court stated that contractual liabilities arising from accidents can constitute an occurrence in cases where the insured lacks the intent to injure.

The court concluded that the “known loss” provision did not preclude coverage because there was no evidence that Main Street had knowledge of the damage prior to the relevant policy period. Additionally, the court found Malt-O-Meal sustained “property damage” because the instant milk was legally unsalable. 

Netherlands next argued that, even if there was property damage, the damages from the settlement were not covered. Specifically, Netherlands argued that the damages Malt-O-Meal sought – destroyed inventory, credits and fees to customers, recall freight and additional costs – are purely economic and not property damage. The court found, however, that the Policy covered not only property damage, but damages Main Street had to pay because of property damage. Therefore, the court concluded, the damages from the settlement were covered, and Main Street successfully made a prima facie showing of coverage. 

The court then turned to examine whether any exclusion applied. The court held that the “your product” exclusion did not bar coverage. The Policy excluded from coverage property damage to “your product” arising out of it or any part of it. “Your product” was defined as “any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of” by: (a) Main Street; (b) others trading under Main Street’s name; or (c) a person or organization whose business or assets Main Street acquired, including “warranties or representations made at any time with respect to fitness, quality, durability, performance or use of ‘your product.'”

Netherlands argued that the “your product” exclusion should apply because the instant milk was Main Street’s product, and because the underlying action between Malt-O-Meal and Main Street alleged a breach of Main Street’s warranties. The court explained that Main Street sought indemnity not for damage to its milk, but for damage to the Malt-O-Meal oatmeal caused by the inclusion of the milk. The court then observed that the mere fact that the underlying action alleged breach of warranties did not change the fact that Main Street sought coverage for damage to a third-party’s product. The court stated that to apply a “sweeping interpretation” of the damage to “your product” exclusion, which would preclude coverage whenever an insured’s product proximately caused a third-party to suffer property damage, “would eviscerate coverage entirely.” 

The court held the “impaired property” exclusion did not preclude coverage. Under the “impaired property” exclusion, the Policy excluded coverage for “‘Property damage’ to ‘impaired property’ or property that has not been physically injured.” The Policy stated property is impaired if it can be restored to use by the “repair, replacement, adjustment or removal of ‘your product’ or ‘your work.'” Because the adulterated milk had been blended with other ingredients and could not possibly be removed from Malt-O-Meal’s oatmeal, the court held the instant oatmeal was not “impaired property.” Additionally, the court reiterated that the oatmeal had been physically injured by the inclusion of the adulterated milk and, therefore, the oatmeal was not “property that has not been physically injured.”

Finally, the court held that the “recall” exclusion did not preclude coverage. Under the “recall” exclusion, the Policy excluded coverage for “damages claimed for any loss, cost or expense” incurred for the recall of “your product; your work; or impaired property; if such product, work, or property is withdrawn or recalled from the market or from use … because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.” The court stated that the oatmeal was not Main Street’s product and was not impaired property. The court further opined that this type of exclusion “has no applicability when the claim is for property damage claimed to have been suffered by another property owner.”