In Hot Stuff Foods, LLC v. Houston Casualty Co., 2014 U.S. App. LEXIS 21727 (8th Cir. Nov. 17, 2014), the Eighth Circuit Court of Appeals reversed and remanded a lower court decision holding that a food company’s voluntary recall was covered under an ‘accidental product contamination’ insurance policy.
Hot Stuff Foods manufactures two versions of sausage breakfast sandwiches – one that contains monosodium glutamate (MSG), and another that does not. In 2011, Hot Stuff found out it had inadvertently distributed sandwiches containing MSG using its MSG-free product labels, making the sandwiches ‘misbranded’ under federal law (see 21 U.S.C. § 343(a)(1)). Hot Stuff reported the mix-up to the FDA, then initiated a voluntary recall of the mislabeled sandwiches.
Hot Stuff was insured under an Accidental Product Contamination policy issued by Houston Casualty Company (HCC). This policy was triggered if product mislabeling “either resulted, or may likely result” in physical illness or bodily injury. Hot Stuff sought indemnification for the recall costs from HCC under this policy. When HCC denied coverage, Hot Stuff filed a declaratory judgment action to recover its claimed losses. The district court granted summary judgment in Hot Stuff’s favor, ruling that the coverage applied. HCC appealed.
The Eighth Circuit reversed and remanded; it noted that the lower court misinterpreted the operative policy term “may likely result” by only requiring Hot Stuff to show a possibility that MSG consumption could cause physical illness. Instead, the Court likened the term as requiring Hot Stuff to show that physical illness/injury was “reasonably likely to result,” and believed that an issue of fact existed as to whether Hot Stuff had met this burden. In addition, the Eighth Circuit noted that policies of this type were not recall insurance policies, stating “[c]overing voluntary recalls that have no direct relation to public health hazards would increase the cost of insurance, extending coverage to voluntary actions that should remain part of an insured’s cost of doing business.”