Massachusetts Court Reverses Ruling in Rotten Seafood Coverage Dispute

The Massachusetts Appeals Court has reversed a lower court’s ruling in a case examining whether damage to scallops at a seafood processing facility, when the cause of damage is unknown, constitutes an occurrence within a commercial general liability (CGL) policy.

A Superior Court judge previously concluded that defendant and insured, Raw 2 Seafoods Inc. (RSI), had no way of proving its claimed loss was caused by an occurrence and granted summary judgement in favor of the plaintiff and insurer, Hanover Insurance Group.

RSI is a seafood processing facility in Fall River, Mass. One of RSI’s customers, Atlantic Capes Fisheries Inc. (Atlantic), sells scallops and various types of seafood globally. Atlantic purchases fresh scallops from fishing vessels and transports them to RSI for processing, portioning, packaging and freezing, according to the court document.

RSI’s staff inspects the scallops, and after processing, the scallops are transported to Arctic Cold Storage (Arctic), a third-party storage facility. Atlantic then ships its customers’ orders directly from Arctic’s facility. RSI handles approximately four-to-six million pounds of scallops for Atlantic per year, the court document said.

Case Background

This case, The Hanover Insurance Group, Inc. vs. Raw Seafoods, Inc., comes after a July 2011 event in which RSI-processed scallops were making their way through customs in Denmark, heading to an Atlantic customer. Upon inspection, the 37,102 pounds of scallops were found to be decomposed and were deemed unacceptable for human consumption.

The United States Food and Drug Administration tested the scallops and confirmed they were spoiled, and the scallops were returned to Arctic’s facility. While there, representatives from Atlantic and RSI also jointly inspected the shipment and confirmed the damage. In addition, they inspected another batch of scallops that were processed by RSI for Atlantic around the same time as the rejected batch and discovered approximately 20,000 additional pounds of damaged product, the court document stated.

“By all accounts, something was rotten in the state of Denmark,” the Appeals Court stated in its decision document.

After the damage was discovered, Atlantic brought an action against RSI in 2012 in the United States District Court for the District of Massachusetts, which included a count for negligence for the damage to the scallops. At that time, Hanover insured RSI pursuant to a CGL policy and agreed to defend RSI in the underlying litigation while reserving its right to deny coverage under the policy.

During the underlying litigation, RSI President Jason Hutchens acknowledged that the scallops were delivered to RSI in good condition, but that “somewhere in [RSI’s] system, the product got messed up,” he said in a statement published in the court document.

“It is undisputed that the damage occurred while the scallops were in RSI’s possession, but the precise cause of the damage at RSI’s facility remains unknown,” according to the court document.

A Federal District Court judge then granted Atlantic’s motion for summary judgment and issued a judgment against RSI and in favor of Atlantic for $599,790.08 with postjudgment interest.

Insurance Policy

During the underlying litigation, Hanover filed action in the Superior Court seeking a declaratory judgment that either the damage to the scallops was not caused by an occurrence within the meaning of the policy or the damage to the scallops fell under one or more exclusions to the policy, so Hanover had no duty to indemnify RSI for any judgment in the underlying litigation.

RSI’s policy with Hanover states that Hanover “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 Appeals Court document stated.

By its terms, the policy applies to property damage caused by an occurrence. The policy defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” the Appeals Court document added.

The policy also contains several exclusions limiting its application, as well as a special broadening endorsement.

RSI asserted counterclaims for breach of contract and violations of Massachusetts law, but a Superior Court judge granted summary judgment in favor of Hanover. In a comprehensive decision, the judge concluded that “because there was no demonstrated accident distinct from [RSI’s] performance of its work,” RSI could not meet its burden of proving that its claimed loss was caused by an occurrence, as a matter of law, the Appeals Court document said.

The Superior Court judge dismissed RSI’s counterclaims, and RSI appealed.

“The parties agree that the cause of the damage ‘was the result of some, as yet, unknown failure on the part of [RSI’s] processing people or handling people within [RSI’s] plant,'” the Appeals Court document stated. “The consensus ends there.”

Appeals Court Ruling

In its appeal, RSI argued that the record demonstrates it has a reasonable expectation of proving an occurrence because RSI did not specifically intend to destroy the scallops, therefore making it an accident rather than an anticipated event. It was noted in the case that this event had never occurred before and has not occurred since.

Hanover counter-argued that RSI produced no evidence as to how the scallops were damaged, leaving the actual cause of damage to speculation. That said, Hanover argued RSI has no reasonable expectation of proving that the damage was caused by an occurrence and cannot survive a motion for summary judgment.

Under Massachusetts law, an “accident” is commonly defined as “an unexpected happening without intention or design,” the Appeals Court document said.

With that in mind, the Appeals Court concluded that Massachusetts law favors RSI’s position in this case.

“While the precise cause or mechanics of the damage to the scallops is unknown, the summary judgment record supports the conclusion that the damage resulted from an unanticipated mishap during RSI’s processing operation…” the decision document stated. “In other words, viewed in the light most favorable to RSI, the damage resulted from an accident, and not from a routine consequence of RSI’s work.”

The Appeals Court vacated the judgment entered by the Superior Court and remanded to trial court for further proceedings consistent with the opinion regarding the applicability of the policy exclusions, Hanover’s duty to defend and RSI’s counterclaims for breach of contract and violations of Massachusetts law.