Insurance Dispute in Oatmeal Recall Resolved in Favor of Insured

A federal court in Minnesota has granted the motion for summary judgment
filed by a company whose insurance carrier claimed it was not required to
cover the company’s settlement of claims arising from a recall of instant
oatmeal purportedly contaminated with instant milk produced at a facility
where the Food and Drug Administration “detected insanitary conditions and
salmonella.” The Netherlands Ins. Co. v. Main St. Ingredients, LLC, No. 11-533 (D. Minn., decided January 8, 2013).

The company had supplied the instant milk to Malt-o-Meal which used it to
make instant oatmeal. After the instant milk and downstream products such
as the oatmeal were recalled, Malt-o-Meal sued both the supplier and the
company that had produced the instant milk. While none of the supplier’s
instant milk was found to contain Salmonella, the case ultimately settled for
$1.4 million.

The insurance company sued the supplier, Main Street Ingredients, for a
declaration that it had no duty to defend or indemnify Main Street. Applying
Minnesota law, the court found that the unambiguous insurance contract
covered the recall which it found to be an “occurrence” that was not a “known
loss” and constituted “property damage.” The court also determined that none
of the policy exclusions—“your property,” “impaired property” or “recall”—
applied because (i) the supplier sought indemnity not for damage to its milk,
but for damage to the Malt-o-Meal oatmeal caused by the inclusion of the
milk; (ii) the oatmeal could not be restored and thus was impaired “since the
ingredients were inextricably blended together”; and (iii) the recall involved a
third party and not the insured.