The Nuts of the Peanut 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 a number of interesting side stories for the insurance industry.

One is the fact that so many states were touched by the recall, which started in late January. Schools, hospitals and other institutions across at least a dozen states were linked by the recall of tainted peanut products. But the bigger story to keep an eye on is what the courts will say about the recall now that the company’s liability insurer — The Hartford — has sued PCA to limit the liability from the outbreak. The suit, filed in federal court in Virginia, contains a number of arguments worth discussing.

There are two reasons for the interest in The Hartford suing PCA to establish the extent of their liability are: 1) such a pre-emptive strike by an insurance carrier is rare — suing to establish liability; 2.) It’ll be curious what legal theories and policy boundaries Hartford will ask the court to establish.

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.”

Intentional or Illegal Acts

Salmonella-tainted peanuts and peanut butter products supplied by PCA may have caused at least eight and possibly nine deaths in the United States, according to Associated Press reports. As many as 1,900 products have been involved. The swirling question of who knew what and when sounds very political.

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 questions.

Federal Food and Drug Administration (FDA) officials reported that Lynchburg, Va. – based PCA knowingly shipped tainted products from its Blakely, Ga., plant. Internal e-mails from PCA’s president to plant managers reportedly instructed them to send out tainted peanuts regardless of the risk because of the lost revenue represented in contaminated food. The Federal Bureau of Investigation (FBI) has joined the investigation looking for criminal wrongdoing.

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’s) commercial general liability (CGL) 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 with a food-borne bacteria qualify as an “accident?” Even if such act qualifies as an “accident,” is the CGL designed to protect the insured from knowingly committing an illegal act?

“Accident” is not defined in the CGL; as such it is assigned its common or legal meaning and use when debating coverage. 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 the consumer by shipping salmonella-tainted products under orders from its president. If PCA did, in fact, knowingly place tainted products in the marketplace, any injuries suffered were not caused by an “accident” and thus do not qualify as “occurrences” under the CGL policy provisions. Hartford can legitimately deny coverage.

Hartford’s second bullet is the CGL’s “expected or intended injury” exclusion. Certainly PCA didn’t “intend” to injure anyone as evidenced by a June 2008 e-mail sent by the company president, “I go through this about once a week, I will hold my breath – again.” But it’s logical to assume PCA should or could have “expected” injury to occur.

More than 600 salmonella-related sicknesses are known to FDA officials, and there are probably hundreds or thousands more that did not make the connection between the peanut butter they ate and the diarrhea, nausea and cramps they felt until the news reports and recalls began.

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 and all injuries suffered from the distribution of the tainted peanuts (it may even be criminally liable). Hartford just wants to establish, up front, its extent of liability for the actions of PCA. If Hartford’s policy provisions are similar to ISO’s, it is possible that Hartford may owe no duty to defend or indemnify PCA for any injuries or damages.

The Batch Clause

Enforcing a batch clause, if one exists, would not likely require court involvement because it is a contractual policy provision. Although defining a “batch” may be difficult, as it appears PCA’s distribution of tainted peanuts and peanut products may, according to AP reports, go as far back as 2006.

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. In essence, the bad batch is the occurrence, not the injuries.

Defining a “batch” and thus limiting coverage is the least likely of the options being pursued by Hartford, but, it might be an option.

The Definition of ‘Occurrence’

Courts use four legal theories to identify when bodily injury or property damage occurs. Each jurisdiction looks to its own case law and legal precedent to decide which of these theories applies in a particular case:

1. “Injury-in-fact theory”: Courts subscribing to this theory consider the date of any actual injury (the day the nail was driven into the electrical wire) as the date of the “occurrence,” regardless of the discovery or manifestation of the injury;
2. “Manifestation theory”: The date the injury becomes evident is the date of “occurrence;”
3. “Exposure theory”: Courts consider the dates of exposure to be the dates of the “occurrence;” or
4. “Continuous trigger theory”: This is also known as the “triple-trigger” theory; multiple occurrence dates (and thus multiple policies) may be involved based on: the date of first exposure; dates of continuous exposure; and date of manifestation.

The “continuous trigger theory” generally applies to pollution and like claims with longer exposure and manifestation periods.

Hartford likely wants the court to direct which theory of occurrence applies, should it be required to defend and/or indemnify PCA. As stated previously, 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 further states that it will not pay for any injury that was known by the insured to have occurred prior to the policy period.

Knowing the legal date(s) of occurrence will direct Hartford which policy(ies) will respond. Hartford wants to limit the dates of occurrence to as few policy periods as possible to lower its potential liability. Also, because the umbrella will likely be called upon, Hartford would probably like to keep the current policy out; it provides the highest total limits.

It’s Still a Guess

Exactly what Hartford is attempting to charge or establish is not yet clear; Hartford has not made its legal plans public. Nevertheless, this discussion may serve to answer the questions some have of how Hartford could possibly deny or limit coverage.