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California Federal District Court Opinion Clarifies Scope of Coverage of Product Contamination Insurance Policies

In Ruiz Food Products Inc. v. Catlin Underwriting U.S. Inc., No. 11-889, 2012 U.S. Dist. LEXIS 131031 (E.D. Cal, Sept. 13, 2012.), the U.S. District Court for the Eastern District of California opined that Product Contamination Insurance (PCI) policies do not limit coverage to manufacturing occurring only at the insured's facility, but should also cover contamination that occurred in ingredient preparation at the supplier's manufacturing facility. The opinion clarifies the scope of coverage provided under PCI policies previously limited in Caudill Seed & Warehouse Co., v. Houston Cas. Co., 835 F. Supp.2d 329 (W.D. Ky. 2011).

Ruiz sued Catlin after Catlin denied an insurance claim to cover losses from a Class One recall of Ruiz's "Tornados," a frozen Mexican food product similar to burritos. The USDA's Food Safety and Inspection Service (FSIS) ordered a recall of Ruiz's Tornados because they contained hydrolyzed vegetable protein (HVP) that had been contaminated with salmonella. The HVP was manufactured by Basic Food Flavors (Basic) and then shipped to Ruiz for use in the Tornados. Ruiz issued the recall of Tornados due to the potential contamination even though none of the products tested positive for salmonella.

The Court granted Catlin's motion for summary judgment, stating that Ruiz's insurance claim failed to meet the terms of coverage under its policy, which required the actual "contamination" of the insured's product. The Court held that a potential defect in the Tornados was insufficient and did not trigger coverage under the Policy in question.

Although the Court ruled in favor of Catlin, it rejected Catlin's reliance on Caudill to suggest that, even if Ruiz could prove contamination of its products, its PCI policy would not provide coverage because such contamination took place at the supplier's facility, not during Ruiz's production. The Eastern District disagreed that contamination must occur at the insured's manufacturing facility.

The Court analyzed the policy language, which included: "Any accidental or unintentional contamination, impairment or mislabeling (including mislabeling of instruction for use) during the manufacture…of the Named Insured's Products (including their ingredients or components)."

The Ruiz Court pointed out how the Caudill court failed to address the phrase "including their ingredients or components," which expanded the definition of "Named Insured's Products." Therefore, the Court determined that coverage is not limited to only final products that are contaminated during the insured's manufacturing process; it is extended to include instances where the insured incorporated an ingredient that became contaminated during the ingredients' "manufacture, blending, mixing, compounding, packaging, labeling, preparation, production or processing."

This decision is noteworthy because it clarifies the coverage available under PCI policies. The opinion allows manufacturers to interpret their PCI policies to include coverage for contamination that occurs at any point in the production process.