Reasonable Expectation of Coverage Question Certified to the Ohio Supreme Court – Understanding Business Interruption Claims, Part 64

I have been following a honey ham-business-income saga in the Ohio federal court system. In HoneyBaked Foods Inc., v. Affiliated FM Ins. Co., No. 08-1686, 2011 WL 834067 (N.D. Ohio March 4, 2011), the district court faced a tough coverage question. Rather than ruling one way or the other, the district court certified the issue to the Ohio Supreme Court to determine whether Ohio law recognizes the doctrine of reasonable expectation of coverage.

The opinion read, in pertinent part as follows:

Following discovery of a pathogenic bacterium in several production runs of its ham and turkey products, HoneyBaked Foods, Inc. claimed a loss of about $ 8 million under its “all-risk” policy with Affiliated FM Insurance Co. The claimed amount covered the losses from the inability to distribute tainted and potentially tainted food products and loss of income.

Affiliated FM denied the claim, asserting that exclusions under the policy leave HoneyBaked without coverage for any part of the loss.

Before presenting HoneyBaked with a proposal for coverage, Affiliated FM conducted a site visit and prepared a risk report identifying and discussing the hazards, exposures and risks at HoneyBaked’s facility. This risk report noted that “[t]he most significant and common hazards exposing the food industry are centered on the susceptibility of food products to spoilage and contamination.” HoneyBaked purchased the subject all-risk policy mindful of this assessment.

In early November, 2006, HoneyBaked discovered that a sample of its products had tested positive for listeria monocytogenes, a pathogenic bacterium that causes listerosis, an uncommon but potentially fatal disease. Further investigation revealed that a risk of contamination affected over one million pounds of product produced from September 5 through November 5, 2006.

HoneyBaked identified the source of contamination to be in one of the hollow rollers on its conveyor system. It removed this system and conducted extensive cleaning and sampling procedures. As a result of the contamination, HoneyBaked suspended operations twice, issued a recall of 46,941 pounds of its ham and turkey products, and eventually disposed of nearly one million pounds of product.

HoneyBaked submitted a claim of loss to Affiliated FM seeking reimbursement for the value of the discarded food product and additional losses resulting from business interruption.

Affiliated FM denied the claim, explaining that the policy excluded the product loss, and because “there is no covered physical loss or damage, any business interruption associated with the listeria contamination is also not covered.”

Following denial of its claims under the policy, HoneyBaked sued Affiliated FM, seeking declaratory judgment of its rights under the policy and alleging that Affiliated FM had breached the contract and acted in bad faith in denying the claim. The parties filed cross-motions for summary judgment.

I found that the policy excludes the product loss caused by listeria monocyogenes. [ECF 54]. The policy contains a contamination exclusion, stating:

This policy does not insure against loss or damages caused by [contamination, including but not limited to pollution]; however, if direct physical loss or damage insured by this policy results, then that resulting direct physical loss or damage is covered.

[ECF 34-15, at 25-27].

The Ohio Court of Appeals for the Eleventh District has explained that the “usual and ordinary meaning” of “contaminate” is “to render unfit for use by the introduction of unwholesome or undesirable elements.” Hartory v. State Auto. Mut. Ins. Co., 50 Ohio App.3d 1, 3 (1988) (citation omitted); see also Richland Valley Prods., Inc. v. St. Paul Fire & Cas. Co., 548 N.W.2d 127, 131 (Wis.App.Ct.1996) (collecting cases uniformly defining the term “contamination”); Landshire Fast Foods of Milwaukee, Inc. v. Emp’rs Mut. Cas. Co., 676 N.W.2d 528, 532 (Wis.App.Ct.2003) (interpreting “contamination” to include the presence of listeria monocytogenes in food products).

HoneyBaked argues, however, that it reasonably believed that the all-risk policy would cover spoilation of its product during processing. As Affiliated FM itself observed in its risk assessment, the susceptibility of food products to spoilage and contamination is the most significant risk faced by the food industry.

A jury could find that HoneyBaked had a reasonable expectation of coverage for losses due to contamination. But the policy, when closely interpreted, excludes losses caused by contamination. The availability of coverage, notwithstanding the exclusion, turns on the question of whether Ohio law incorporates the reasonable-expectations doctrine and applies such doctrine to this case.

I will continue following the case and will report the outcome of the plight that so many of my clients endure.