Every year, thousands of products are recalled across a wide range of categories. In the event of a product recall, a host of factors come into play, including litigation initiated by the manufacturer against a supplier, distributor or food processor that allegedly committed an act that caused the recall. Upon being sued by a manufacturer, the supplier, distributor or processor may seek coverage under its commercial general liability insurance policy. However, even if the appropriate insurance is purchased, the insurer may deny coverage, claiming either that the insurance policy does not cover such losses, or that the policyholder has not complied with the policy’s terms.
Insurance coverage disputes arising from a third party’s product recall are common and are on the upswing. In two recent cases, however, policyholders were successful in securing coverage for damages arising from a product recall, suggesting that persistence in the face of a claims denial has a good chance of paying off.
In Great American E&S Insurance Co. v. Power Cell LLC, the insurance company unsuccessfully sought a declaration that it had no duty to defend its policyholder in an underlying action because, among other reasons, the policyholder had failed to provide timely notice of the potential claim. The policyholder, a battery manufacturer, supplied batteries to various companies, including the maker of battery-operated window shades. The shade manufacturer recalled some of its battery-operated window shades after several customers complained that the batteries were defective. The battery supplier sued the shade manufacturer seeking a declaration that the batteries were safe and not the cause of the recall. In turn, the shade manufacturer countersued, alleging the policyholder’s batteries were defective. Upon receiving the counterclaim, the policyholder provided notice to its insurance company. The insurance company denied coverage, however, arguing that the policyholder knew of the problem with its batteries well before notice was provided.
The Illinois federal district court ultimately found that the policyholder had provided timely notice. The court noted that the policy did not specify a time frame in which the policyholder needed to notify the insurance company, only that notice be given “as soon as practicable.” The court determined that the policyholder had provided notice within a reasonable amount of time and that the insurance company was unable to demonstrate that it had suffered any prejudice as a result of the policyholder’s delay in providing notice.
In Hanover Insurance Group. v. Raw Seafoods, Inc., defendant Raw Seafoods, Inc. (RSI) processed scallops for its customer, Atlantic Cape Fisheries. In 2011, a shipment of more than 37,000 pounds of Atlantic scallops it had processed went through customs in Europe. The scallops were found to be decomposing and exhibiting “a strong smell of ammonia” and were later deemed “unfit for human consumption.” Shortly thereafter, Atlantic and RSI inspected a separate batch of RSI-processed Atlantic scallops and found those scallops to be similarly contaminated.
Atlantic sued RSI for negligence in spoiling the scallops. RSI, in turn, sought insurance coverage under its CGLI policy with Hanover Insurance Company. Hanover agreed to defend RSI in the underlying lawsuit under a reservation of rights, but then filed a separate declaratory action seeking a ruling that RSI was not covered under the policy because the damage to the scallops was not caused by an “occurrence.” Hanover further argued that coverage was precluded by numerous exclusions in the policy.
Atlantic successfully obtained a judgment against RSI in the underlying matter on a theory of negligence, specifically, res ipsa loquitur (the occurrence of an accident implies negligence). After judgment was entered in favor of Atlantic in the negligence action, RSI and Hanover filed cross-motions for partial summary judgment in the insurance coverage litigation.
The Massachusetts Appeals Court reversed a finding for the insurance company, finding that Hanover was bound by the determination in the underlying action “that the damage to the scallops was due to RSI’s negligence, not as part of the ordinary work process and not the result of any intentional conduct.” The court thus ruled there was an “occurrence” under RSI’s CGLI policy that triggered coverage. On remand, the trial court granted RSI’s renewed motion for summary judgment, finding that Hanover owed RSI coverage for the underlying claim and that various exclusions did not apply.
A policyholder that finds itself entangled in a third-party recall must act swiftly to provide notice to its insurance company and should not accept a denial of coverage at face value. The proliferation of recall-related litigation means that policyholders need to be especially aware of the various coverages that they have purchased.