April served as a microcosm for recent trends in the world of recalls. A gas range manufacturer agreed to pay a $4.65 million civil penalty to the CPSC. In a six-year period, the manufacturer received 170 incident reports that the gas ranges had turned on spontaneously and could not be turned off using the control knobs. But the manufacturer knowingly failed to notify the CPSC immediately. The manufacturer agreed to pay the massive penalty, maintain an enhanced compliance program and maintain a related system of internal controls and procedures.
Notably, the CPSC accepted the penalty agreement by a vote of 4 to 1. Acting Chairman Buerkle voted to accept a smaller penalty. Buerkle has been an outspoken critic of civil penalties, voting against their approval in 9 of 12 cases. Will her leadership at the CPSC impact the trend of multimillion dollar civil penalties or will the upward trend in civil penalties continue? For now, it appears that Buerkle is a lone dissenter.
Children’s products continued to be a focus this month as carriers, booties, toys and clothing were subjects of recent recalls. Furniture tip-overs also resurfaced as furniture manufacturers continue struggling to combat this highly publicized problem. Finally, recreational vehicles – off-highway vehicles, ATVs and mountain bikes – experienced recalls in April. This development is perhaps unsurprising because spring is here and consumers are taking advantage of the mild weather.
Attorneys Syed Ahmad, Andrea DeField and Jennifer White of Hunton & Williams LLP’s Insurance Coverage practice group weigh in regarding a few noteworthy decisions on insurance coverage for product recalls in April:
In The Hanover Insurance Group, Inc. v. Raw Seafoods, Inc., 91 Mass. App. Ct. 401 (2017), a Massachusetts appellate court reversed a lower court’s grant of summary judgment for the insurer where the insured seafood processor did not know the cause of a spoiled scallop shipment that led to a judgment against it for negligence for approximately $600,000 plus interest. In the coverage action, the appellate court found that while the exact cause of damage to the scallops was unknown, the undisputed facts demonstrated that the damage occurred at Raw Seafoods’ facility and that all evidence supported a finding that the damage was unintentional, thus constituting an accidental occurrence as required by the policy. In part because such damage had never occurred before and had never occurred since, the appellate court found that the damage constituted an occurrence, reversed the trial court’s grant of summary judgment to the insurer and remanded for the trial court to consider Raw Seafoods’ counterclaims against the insurer for breach and violations of statute.
In The Travelers Property Casualty Co. of America v. USA Container Co., Inc., No. 14-3685 (3d. Cir. April 18, 2017), the Third Circuit Court of Appeals affirmed summary judgment for the insured, a transporter of damaged corn syrup that had been sued by a corn syrup distributor after the syrup was overheated, forcing the distributor to sell it at a reduced rate. Travelers relied on two exclusions for precautionary recalls and faulty workmanship. Similar to the Raw Seafoods case, the court here found that the underlying claims constituted an occurrence and that neither exclusion applied to preclude coverage where the damaged corn syrup was not recalled, repaired or replaced, but was instead simply sold for a lower price.
In Cheer Pack North America, LLC, v. Valley Forge Insurance Company and Continental Casualty Co., Case No. 15-14135-FDS (D. Mass. April 28, 2017), the U.S. District Court for the District of Massachusetts granted summary judgment for Cheer Pack, finding that both insurers owed Cheer Pack a duty to defend in lawsuits seeking damages for a voluntary recall concerning baby food contamination allegedly caused by the failure of packaging manufactured by Cheer Pack. The parties cross-moved for partial summary judgment on the insurers’ duty to defend, with the insurers arguing that their policies contained an exclusion for bodily injury or property damage arising out of “microbe” exposure. Those exclusions, however, contained an exception that Cheer Pack argued applied for insureds whose business is “food processing.” The Court found the phrase “food processing” to be ambiguous, and thus construed the exception in favor of coverage for Cheer Pack.
Finally, while not a court decision yet, a recent complaint filed by Houston Casualty Company demonstrates how coverage disputes for product recalls may extend to disputes between insurers. In Houston Casualty Co., the insurer of Steven-Robert Originals, LLC (“SRO”), a company that provides desserts to food service and retail in-store bakeries such as Pizza Hut, filed an equitable subrogation action against another of SRO’s insurers, Valley Forge Insurance Co., after Houston Casualty had paid over $800,000 to SRO under its Product Contamination Policy for losses sustained when Pizza Hut customers discovered metal blades and rubber gaskets in their brownies. Arguing that the Valley Forge Policy also provided coverage for the loss making the insurers mutually responsible, Houston Casualty filed the equitable subrogation and unjust enrichment action in the Southern District of New York. The suit is Houston Casualty Company v. Valley Forge Insurance Company.
Total Recalls: 21
Hazards: Fire/Burn/Shock (7); Fall (6); Crash (2); Tip-Over (2); Choke (2); Ingestion (1); Impact (1)
Click on the below chart for additional information.