Court Refuses to Allow Vanilla Maker’s Cross Claims in Mercury-Contamination Insurance Coverage Litigation

The Third Circuit Court of Appeals has upheld a district court’s decision not to allow a flavoring company to file cross claims in litigation between an insurance carrier and the company that supplied vanilla beans tainted with mercury to the flavoring company. The Travelers Ins. Co. v. Dammann & Co., Inc., No. 09-1225 (3d Cir., decided February 5, 2010). The flavoring company sought to hold the vanilla bean supplier liable under contract, tort and indemnification theories, and the district court held that the proposed cross claims were time-barred or failed to state a claim. The Third Circuit agreed.

The flavoring company’s request to file cross claims occurred more than four years after it received the vanilla beans, and its breach of warranty claims were thus untimely under the Uniform Commercial Code. Because New Jersey law applied to the case, the appeals court then discussed at length why it believed New Jersey courts would apply the economic loss doctrine to preclude liability for the products liability claims the flavoring company asserted to recover for scrapping contaminated finished flavoring products, claims from customers who bought the products, testing costs, plant cleaning costs, internal labor and administrative costs, and lost profits. According to the Third Circuit, these are the types of direct and consequential damages generally recoverable in contract. Thus, the court ruled that New Jersey’s six-year statute of limitations for products liability claims would not apply to make the flavoring company’s claims timely.

The court also determined that indemnification is available to obtain recovery from the indemnitor for liability incurred to a third party only. Because the flavoring company was seeking recovery for damages to itself, the court found that its express indemnification claim was also governed by contract principles and was thus time-barred. Because the flavoring company “failed to allege that it had incurred ‘any “legal obligation” under which it was compelled to pay the claimed money to its customers and distributors’ and failed to point to any ‘settlement
agreement, court order, etc. under which it was obligated to make these payments,’” the court further found that it had failed to state a claim for implied indemnification.