A Sticky Insurance Coverage Dispute
The Seventh Circuit recently decided an insurance coveragedispute involving spoiled peanut butter. The court held that a peanut butter company’s insurer was not obligatedto indemnify the company for amounts paid to a cookie mix manufacturer afterthe peanut butter company supplied spoiled peanut butter. (Image Source: Wikipedia). Under the terms of theInsurance Coverage Agreement between the peanut butter company and the insurer,the spoiled peanut butter did not cause “property damage” subject toindemnification. Moreover, certain “business risk” exclusions to coverage applied.
Here is the story as Judge Sykes tells it:
The peanut butter in question was contained in sealedpackets supplied by plaintiff Sokol and Company (“Sokol”) to itscustomer Continental Mills (“Continental”) for inclusion in boxes ofContinental’s cookie mix. When Continental discovered that the peanut butterhad gone bad, it retrieved the cookie mix, substituted fresh peanut butterpackets, and sought reimbursement from Sokol for the costs associated with thereplacement. Sokol filed notice of Continental’s claim with Atlantic MutualInsurance Company (“Atlantic”),its Comprehensive General Liability (“CGL”) insurer. Atlantic denied coverage, citing a number of the policy’s“business risk” exclusions. Sokol then paid Continental’s claim itself andsought indemnification from Atlantic under thepolicy. Atlantic again denied coverage and this litigation ensued.
After parsing out the difference between a duty to defendand a duty to indemnify, the court turned to the language of the policy, noting that “property damage” was defined as:
a. Physical injury to tangible property, including allresulting loss of use of that property. All such loss of use shall be deemed tooccur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All suchloss of use shall be deemed to occur at the time of the “occurrence”that caused it.
Applying this definition, the court held that “Sokol’s peanut butter paste . . . did not cause ‘physicalinjury to tangible property.'” The courtreasoned:
The paste was sealed in individual packets, and thosepackets were simply removed from the boxes of cookie mix. There has been noallegation that the spoilage of the peanut butter affected the other foodproducts contained within the boxes. Sokol suggests weakly that whenContinental opened the boxes to remove and replace the spoiled paste, theopening itself constituted “property damage” within the meaning ofthe policy. The act of opening and resealing cookie mix boxes can scarcely becharacterized as an “injury” to the boxes.
Even assuming the spoiled peanut butter caused “propertydamage,” the court held that certain “business risk” exclusions from coverageapplied, namely: the exclusion of damage to impaired property and the exclusionof recalled products.
Sokol & Co. v. Atlantic Mut. Ins. Co. (7th Cir.
[Meredith R. Miller]