November 30, 2005
A Sticky Insurance Coverage Dispute
The Seventh Circuit recently decided an insurance coverage dispute involving spoiled peanut butter. The court held that a peanut butter company’s insurer was not obligated to indemnify the company for amounts paid to a cookie mix manufacturer after the peanut butter company supplied spoiled peanut butter. (Image Source: Wikipedia). Under the terms of the Insurance Coverage Agreement between the peanut butter company and the insurer, the spoiled peanut butter did not cause “property damage” subject to indemnification. Moreover, certain “business risk” exclusions to coverage applied.
Here is the story as Judge Sykes tells it:
The peanut butter in question was contained in sealed packets supplied by plaintiff Sokol and Company ("Sokol") to its customer Continental Mills ("Continental") for inclusion in boxes of Continental's cookie mix. When Continental discovered that the peanut butter had gone bad, it retrieved the cookie mix, substituted fresh peanut butter packets, and sought reimbursement from Sokol for the costs associated with the replacement. Sokol filed notice of Continental's claim with Atlantic Mutual Insurance Company ("Atlantic"), its Comprehensive General Liability ("CGL") insurer. Atlantic denied coverage, citing a number of the policy's “business risk” exclusions. Sokol then paid Continental's claim itself and sought indemnification from Atlantic under the policy. Atlantic again denied coverage and this litigation ensued.
After parsing out the difference between a duty to defend and a duty to indemnify, the court turned to the language of the policy, noting that “property damage” was defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
Applying this definition, the court held that “Sokol's peanut butter paste . . . did not cause 'physical injury to tangible property.'" The court reasoned:
The paste was sealed in individual packets, and those packets were simply removed from the boxes of cookie mix. There has been no allegation that the spoilage of the peanut butter affected the other food products contained within the boxes. Sokol suggests weakly that when Continental opened the boxes to remove and replace the spoiled paste, the opening itself constituted "property damage" within the meaning of the policy. The act of opening and resealing cookie mix boxes can scarcely be characterized as an "injury" to the boxes.
Even assuming the spoiled peanut butter caused “property damage,” the court held that certain “business risk” exclusions from coverage applied, namely: the exclusion of damage to impaired property and the exclusion of recalled products.
Sokol & Co. v. Atlantic Mut. Ins. Co. (7th Cir.
[Meredith R. Miller]
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