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(Article from Insurance Law Alert, November 2015)

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A Massachusetts appellate court ruled that an all-risk policy does not provide coverage for losses sustained in connection with a company’s decision to destroy beverage products after certain quality control failures.  H.P. Hood LLC v. Allianz Global Risks U.S. Ins. Co., 88 Mass. App. Ct. 613 (Mass. App. Ct. 2015).

Hood conducted various quality control tests in connection with its production of a milk-based beverage.  In the May 2009 production run, a number of bottles (representing about nine percent of the total production run)  failed the “secure seal test” designed to ensure the hermetical seal of the bottles.  Because Hood was unable to isolate the problematic bottles, it chose to destroy the entire May 2009 production run.  Thereafter, Hood sought coverage for the losses associated with the destruction under an all-risk policy issued by Allianz.  Allianz denied coverage on the ground that there was no “damage to Insured Property.”  More specifically, Allianz noted that none of the bottles lost its seal or otherwise sustained physical damage before Hood made the business decision to destroy the production run.  Allianz argued that “a mere increased risk of future property damage” is not a covered loss.  In response, Hood argued that once doubts have been raised as to the fitness of a product intended for human consumption, the requisite property damage has occurred. 

Noting a split of authority on this issue, the court declined to rule on whether this scenario presented “property damage.”  Instead, the court ruled that even assuming there was damage to property, an exclusion for “faulty workmanship, material, construction or design” barred coverage.  The court further held that coverage was not restored by an ensuing loss provision, which stated that “if physical loss or damage not otherwise excluded . . . results [from an excluded loss], then only such resulting physical loss or damage is covered.”  Hood argued that even if the initial loss was caused by an excluded event (what turned out to be defective bottle caps), the resulting loss of the milk product was covered under the ensuing loss provision.  The court acknowledged the “interpretive challenges” of the ensuing loss provision, explaining that some courts have required damage that is “wholly separate” from the damage caused by the excluded event, while other courts have allowed coverage so long as the resulting damage is “different in kind.”  Without deciding the appropriate standard for “ensuing loss” coverage, the court held that “[o]n the particular facts of this case, Hood cannot prevail under any reasonable interpretation of the resulting loss language.”