As the egg recall from two egg producers in Iowa, Hillandale Farms of Iowa, Inc. and Wright County Egg, continues to unfold (a half a billion eggs at this writing), affected downstream purchasers should consider the availability of insurance coverage for resulting losses. Some policyholders may have purchased recall insurance, which is designed to specifically insure costs arising from recalls. Insureds that have not purchased recall insurance may also have coverage available, however, despite the standard recall exclusion included in their policies.
A typical recall exclusion excludes coverage for "[d]amages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of 'your product,' 'your work,' or 'impaired property,' if such product or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it."
"Your product" means "(1) [a]ny goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: (a) [y]ou; (b) [o]thers trading under your name; or (c) [a] person or organization whose business or assets you have acquired; and (2) [c]ontainers (other than vehicles), materials, parts or equipment furnished in connection with such good or products." "Your product" also includes "[w]arranties or representations made at any time with respect to the fitness, quality, durability, performance or use of 'your product'; and the providing of or failure to provide warnings or instructions."
"Your work" means "(1) [w]ork or operations performed by you or on your behalf; and (2) [m]aterials, parts or equipment furnished in connection with such work or operations. "Your work" also includes "[w]arranties or representations made at any time with respect to the fitness, quality, durability, performance or use of 'your work'; and the providing of or failure to provide warnings or instructions."
"Impaired property" means "tangible property, other than 'your product' or 'your work' that cannot be used or is less useful because: (1) it incorporates 'your product' or 'your work' that is known or thought to be defective, deficient, inadequate or dangerous; or (2) [y]ou have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by: (a) the repair, adjustment or removal of 'your product' or 'your work'; or (b) [y]our fulfilling the terms of the contract or agreement."
The recall exclusion may not apply to claims against an insured purchaser or producer of the eggs facing claims from a subsequent purchaser who incorporated the eggs into another product. The exclusion only applies to "your product," "your work," and "impaired property"; claims by a subsequent purchaser who incorporates those eggs into its own product and seeks damages for destruction or loss of that product would not constitute "your product" or "your work" of the insured purchaser or producer.
Because a subsequent product that incorporates contaminated eggs likely cannot be restored by removing the eggs, the subsequent product would not constitute "impaired property" of the insured.
In addition, earlier versions of the exclusion limit the scope of the recall to a recall by the insured as opposed to "any person or organization." Some policies may still incorporate this earlier version of the exclusion, which provides broader coverage.
Insurers may also argue that any loss from a recall does not constitute property damage. Commercial general liability policies typically require the insurer to "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." "Property damage" includes "[p]hysical injury to tangible property, including all resulting loss of use of that property." Incorporation of eggs into other products may constitute "property damage." Property damage results from the physical injury to the purchaser's product based on the alleged salmonella contamination and the resulting loss of use of that product. Notably, courts that have addressed this issue have consistently found that property damage and loss of use occur when an insured's defective product is incorporated into another product.
Finally, any doubts about coverage should be resolved in favor of the policyholder, especially defending the policyholder in any litigation. An insurer's duty to defend arises whenever a claim includes allegations arguably within the scope of the policy. In many jurisdictions, a policyholder may point to extrinsic facts to support a duty to defend, while the insurer may not do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
