Insurance Policy Ambiguous; Broad Coverage Could Be Available for Tainted Peanut Butter Claims

A divided Delaware Supreme Court has determined that ConAgra’s insurance 0contract is ambiguous and therefore might provide broader coverage, with a lower “retained limit” or deductible, for claims arising out of an alleged Salmonella outbreak involving the company’s peanut butter. ConAgra Foods, Inc. v. Lexington Ins. Co., No. 227, 2010 (Del., decided April 28, 2011). The court reversed a lower court ruling that granted, in part, the insurer’s motion for summary judgment and remanded for consideration of extrinsic evidence about what the parties intended when they agreed to a “lot or batch” endorsement; if that intent cannot be ascertained, the lower court was instructed to interpret the contract in ConAgra’s favor. The court also determined that because ConAgra exceeded the retained limit, the insurer’s duty to defend was triggered on the date the food maker’s liabilities exceeded that limit.

The policy at issue included two definitions for “occurrence,” one of which was
in the “lot or batch” endorsement. ConAgra contended that the endorsement,
which imposed a higher retained limit to trigger coverage, did not supplant
the policy’s general liability occurrence definition. By 2008, the company
had incurred liability exceeding $3 million, the retained limit that triggered
coverage under the policy’s general liability provisions. It estimated that some
20,000 people were expected to bring bodily injury or illness claims and that
the company had already settled or resolved more than 2,000 claims. The
tainted peanut butter had been produced in a single, continuous run that the
company had not segregated by lot or batch.

According to the court’s majority, the endorsement could be interpreted in
a way that either expanded or limited coverage. Under one interpretation,
the “lot or batch” provision, defined as “a single production run at a single
facility not to exceed a 7 day period,” could segment claims, for insurance
coverage purposes, into separate seven-day periods, and would disregard the
actual number of occurrences, thus triggering the insurer’s duties “only when
ConAgra incurred $5 million in liability for a given seven day period.”

Under a second, equally reasonable interpretation, said the court, “the Lot or
Batch provision would operate to convert multiple claims in one lot or batch
into a single Occurrence for insurance coverage purposes,” and the $3 million
retained limit for a general liability occurrence would apply. “[I]f only one
Occurrence arose, the Lot or Batch Provision would not balkanize that one
Occurrence into multiple Occurrences corresponding to seven-day intervals.”
Given the ambiguity, Delaware courts are permitted to consider extrinsic
evidence of the parties’ intent.

The two dissenting justices would have found that the endorsement was
unambiguous and altered the general definition of occurrence in the policy.
They would have ruled that “the policy requires ConAgra to satisfy a $5 million
per seven day production run retained limit with respect to the peanut butter
claims before it can trigger Lexington’s insurance coverage.”