By Scott Turner
The U.S. Court of Appeals for the Eight Circuit, in Netherlands Ins. Co. v. Main Street Ingredients, LLC (--- F.3d ----, 2014 WL 1012793, March 18, 2014) (Minn. law), held that a policyholder’s liability from its accidentally “bad” work or product being incorporated as a component into a larger, compound piece of property, thereby damaging or ruining the latter, was covered by the standard commercial general liability (CGL) policy.
Specifically, the court found that the resulting liability for breach of contract and breach of warranty satisfied the “property damage” and “occurrence” requirements and was not excluded from coverage under the “your product exclusion,” “impaired property exclusion,” or “product recall exclusion.”
While this case involved an ingredient incorporated into a manufactured food product, it nevertheless has profound implications for the coverage of defective construction work and products.
Main Street Ingredients, the policyholder, bought dried milk from Plainview Milk Products Cooperative and then sold it to Malt–O–Meal, which used it as an ingredient in its instant oatmeal products. The U.S. Food and Drug Administration found Salmonella bacteria on food-contact surfaces and areas in Plainview’s plant used to manufacture the dried milk products. As a result, Malt–O–Meal recalled its instant oatmeal containing the dried milk. Then, it sued. As to Main Street, Malt–O–Meal asserted claims of strict products liability, breach of express warranties, breach of implied warranties of merchantability and fitness for a particular purpose, and breach of contract, all based upon the damage caused to the instant oatmeal.
Main Street’s CGL insurer, The Netherlands Insurance Co., defended under a reservation of rights and then brought a declaratory judgment action as to whether it had a duty to defend or indemnify Main Street, asserting the “property damage,” “occurrence,” the your product exclusion, impaired property exclusion, and recall exclusion as defenses.
The ConstructionPro Network member version of this article contains details about the court's decision in the case and the author's commentary.