Buying The Right Insurance Coverage Is Only Half The Battle

Originally published in Policyholder Advisor, Volume 18, Number 5, September/October 2009.

Specialized insurance coverage, excluded from standard-form commercial general liability (CGL) policies, is available for risks specific to many industries. Common examples include policies for risks such as pollution, product recall, and food-borne illness. While such specialized policies can be indispensable to companies vulnerable to such risks, they are still subject to the overly broad coverage defenses that insurance companies use with CGL policies. No matter how comprehensive a company's insurance portfolio, corporate counsel still needs to be prepared to fight for coverage once a loss occurs. Three recent insurance coverage battles in the food and restaurant industries — one involving a CGL claim and two involving claims under more specialized policies —illustrate this core principle.

Contamination Allegations of Damage to Property Falls Within Scope of CGL Insurance Policy

In the first case, involving a CGL insurance policy, a New Jersey-based importer of raw materials was sued by a customer, a manufacturer of finished food flavorings, to whom it had sold flavor materials. The customer alleged that it sustained damages to its property when five metric tons of raw flavoring materials it bought from the policyholder allegedly contained trace amounts of mercury. The customer further claimed that by the time it discovered the mercury, it already had incorporated the allegedly contaminated flavoring raw materials into its other products. The insurance company denied coverage for the entire claim and sued its policyholder, seeking a ruling from the Court that its policyholder was not covered for the customer's claims because the alleged claims did not constitute covered "property damage" or "bodily injury" within the meaning of the policy.

The Court disagreed with the insurance company and found that property damage did in fact occur and that the policy provided coverage. CGL policies generally define "property damage" as "[p]hysical injury to tangible property" as well as "[l]oss of use of tangible property that is not physically injured." The Court concluded that under the terms of the insurance policy, the customer's contamination allegations of damage to its property — finished food flavorings made from the allegedly contaminated raw flavoring materials, and its processing equipment — fell squarely within the scope of the CGL policies.

Beware...