Applying Minnesota law, the federal district court determined the supplier of contaminated dried milk had coverage. The Netherlands Ins. Co. v. Main Street Ingredients, LLC, 2014 WL 1012793 (8th Cir. March 18, 2014).
In 2007, Plainview Milk Products sold dried milk to Main Street Ingredients, LLC, who then sold the dried milk to Malt-O-Meal. The dried milk was used by Malt-O-Meal in its instant oatmeal products.
In June 2009, the FDA found Salmonella bacteria at Plainview's plant. The FDA also observed thirteen instances of insanitary conditions in the plant. Plainview issued a product recall notice announcing a "voluntary recall" of dried milk, stating its dried milk had "the potential to be contaminated with Salmonella."
Main Street forwarded the notice to Malt-O-Meal. As a result, Malt-O-Meal recalled its instant oatmeal that contained the recalled dried milk.
Malt-O-Meal then sued Main Street and Plainview. Main Street was insured under a CGL policy with Netherlands. Netherlands defended under a reservation of rights and then sued for a declaration that it had no duty to defend or indemnify Main Street. The district court granted Main Street's motion for partial summary judgment. The parties stipulated to entry of final judgment and the district court awarded $1.4 million, plus interest, to Main Street. Netherlands appealed.
Netherlands argued it had no duty to indemnify because (1) the dried milk did not suffer "property damage," and (2) the sale of the dried milk to Malt-O-Meal was not an "occurrence."
Regarding "property damage," the parties agreed there was no finding that either the dried milk or the instant oatmeal contained Salmonella. Nevertheless, the district court found "property damage" was present because the instant oatmeal was physically affected, as it included instant milk that was manufactured in insanitary conditions. Testimony established the insanitary conditions in the Plainview plant. Further, the FDA voluntary recall of the dried milk was far reaching. Therefore, the district court found the incorporated instant oatmeal was physically affected because it included instant milk that was manufactured in insanitary condition. Under Minnesota law, this constituted "property damage" to the instant oatmeal.
The district court also found the recall of the instant milk was an "occurrence" because there was no evidence that Main Street intended to injury Malt-O-Meal. Netherlands maintained that where there was failure to provide a product that complied with its contract or guarantees, there was no "accident." But Minnesota law established an "occurrence" could occur in a breach of contract context. The Eighth Circuit agreed that because Main Street did not intentionally sell to Malt-O-Meal FDA-condemnable dried milk, the sale of the dried milk was an "accident" which established an "occurrence."
Turning to the exclusions, the "your product" exclusion did not apply. Malt-O-Meal's instant oatmeal was not "your product" under the policy's definition because Main Street did not manufacture, sell, handle, distribute or dispose of Malt-O-Meal's instant oatmeal.
Nor did the "impaired property" exclusion apply because the instant oatmeal could not "be restored to use." Second, the instant oatmeal was "physically injured."
Consequently, the decision of the district court was affirmed.
This case may have significance in disputes over coverage for construction defects and property damage. The decision found "property damage" in the instant oatmeal based on Salmonella that may or may not have been present. Therefore, a potentially damaged product merged into a completed project could constitute "physical injury to tangible property," i.e., "property damage."