United States: Hunton Retail Law Resource: Recall Roundup: August

This month marks the 10th anniversary of the Consumer Product Safety Improvement Act ("CPSIA"), which was signed into law on August 14, 2008. CPSIA was a bipartisan response to unsettling events in the world of consumer products that occurred in 2007. During that landmark year, reports emerged about lead contamination in a wide range of consumer products—including children's toys—that forced the CPSC into the national spotlight and facilitated over 400 recalls. The CPSIA aimed to significantly enhance the CPSC's regulatory and enforcement power by doubling its budget, increasing its staff levels, prohibiting the sale of recalled products and increasing its civil penalties. For example, before CPSIA, the CPSC could impose civil penalties in the amount of $8,000 per violation, with a maximum of $1.825 million. But in 2008, CPSIA increased significantly the amount of civil penalties to $100,000 per violation, with a maximum of $15 million, adjusted for inflation. Ten years later, the industry has seen the average amount of a CPSC civil penalty surge exponentially:

In other news, a few aspects of August's recalls are noteworthy. A manufacturer recalled its electric space heaters this month after receiving reports that 19 of the heaters have caught fire. Sadly, one of these fires resulted in the death of a 90-year-old man in December 2017. Also this month, nearly half of August's recalls (9 of 22 recalls) concerned outdoor vehicles, including bicycles, motorcycles, snowmobiles, utility vehicles and recreational off-road vehicles ("ROVs"). This development is consistent with the CPSC's continued focus on ROVs and all-terrain vehicles, which included the largest civil penalty in CPSC history—$27.25 million—back in April.

Attorneys from Hunton Andrews Kurth LLP's Insurance Coverage practice group weigh in on two recent food recall insurance disputes.

In the first case, Starr Surplus Lines Insurance Co. v. Mountaire Farms, Inc., No. 2:18-cv-67-JDL (D. Me. Aug. 02, 2018), a federal district court in Maine dismissed a lawsuit brought by Starr, a subrogee, against a chicken supplier, Mountaire Farms, asserting that Mountaire delivered contaminated chicken products to Starr's insured, AdvancePierre Foods, that resulted in recall of more than 1,700,000 pounds of chicken products. AdvancePierre contracted with Mountaire to deliver raw chicken parts to use in its Portland processing facility. Mountaire delivered more than 100,000 pounds of chicken to AdvancePierre that were later linked to a salmonella outbreak in Wisconsin and Minnesota. The salmonella scare led AdvancePierre to recall 1.7 million pounds of chicken product, costing it more than $10 million in damages. AdvancePierre's investigation linked the outbreak to two truckloads of chicken it received from Mountaire.

AdvancePierre submitted a recall insurance claim to its insurer, Starr, which paid the policy limits of $10 million. Starr then initiated a subrogation lawsuit against Mountaire to recover the $10 million it paid to AdvancePierre, asserting claims for breach of implied warranties of merchantability and fitness for a particular purpose and for strict liability arising from Mountaire's allegedly contaminated deliveries. Mountaire moved to dismiss Starr's lawsuit, arguing, among other things, that Starr's claims fail because salmonella is an "inherent and recognized characteristic" of raw chicken and, therefore, could not be considered "defective," "unfit for its particular purpose" or "unreasonably dangerous," which are required elements of Starr's claims. Mountaire further argued that Starr's strict liability claim is barred by the economic loss doctrine. The court agreed with both arguments and dismissed the lawsuit.

First, applying Maine's "reasonable expectation test" for defective food product claims, the court found that the average consumer should reasonably expect that raw, uncooked chicken is not safe for human consumption and, therefore, the existence of salmonella in the raw chicken could not be considered a product defect. Second, the court held that the economic loss doctrine barred Starr's strict liability claim because Maine courts do not permit tort recovery for economic losses like the claimed recall costs without a claim of personal injury or damage to other property. The Mountaire decision underscores the importance of strong recall insurance coverage to adequately protect from contamination and recall events, given that losses arising from inherent or naturally occurring food "defects" may not be sufficient grounds to recover directly from the supplier under a product liability theory in the event that insurance proceeds are insufficient.

In the second case, JSL Foods, Inc. v. Certain Underwriters at Lloyd's London, No. BC718081 (Cal. Super. Ct., Los Angeles Cnty. filed Aug. 14, 2018), cookie manufacturer JSL Foods sued Lloyd's for alleged wrongful breach of its duty to reimburse JSL for over $890,000 in losses that JSL incurred as the result of a voluntary product recall after one of its customers received complaints that cookies it received from JSL were contaminated with mold. The Lloyd's product recall insurance policy at issue provided coverage for losses incurred by JSL due to "accidental contamination," which is defined to mean an unintentional error by JSL in the manufacturing of products, provided that consumption of the product would lead to bodily injury, sickness or death.

JSL provided detailed supporting documentation, including photographs of the moldy cookie products, to Lloyd's in various claim submissions. Lloyd's ultimately denied coverage, however, on the grounds that there was no proof that the customers' consumption of the cookies would lead to bodily injury, sickness, disease or death, or that the voluntary recall was undertaken because the product was dangerous to customers' health, stating that "[t]he fact that something should not be consumed does not necessarily mean that the mold will cause bodily injury or sickness." JSL alleges in its complaint that "Lloyd's position belies basic common sense and federal recommendations," citing USDA guidance suggesting that consumption of moldy foods can lead to a number of illnesses.

Unable to resolve the dispute through extensive pre-suit negotiation and mediation, JSL now seeks to recover more than $890,000 in damages due to Lloyd's alleged breach of contract and the implied covenant of good faith and fair dealing. JSL outlines numerous instances of improper and unlawful conduct in Lloyd's claims handling practices, including repeatedly making excessive and duplicative requests for information and imposing onerous testing requirements on JSL to analyze the presence of mold in the contaminated products that was already substantiated by JSL's other evidence.

The Lloyd's coverage position in JSL's lawsuit, if true, seems extreme and at a minimum conflicts with the spirit if not the letter of the product contamination policy, which JSL obtained to protect its products from contamination by forms of mold that would be harmful if ingested. It is unclear from the complaint whether further testing of the presence of the contaminated products is still underway. We will continue to monitor this lawsuit for further developments.

Total Recalls: 22

Hazards: Fire/Burn/Shock (8); Injury (4); Crash (3); Fall (2); Laceration (1); Choke (1); Entrapment (1); Violation of Federal Standard (1); Explosion (1)

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