A Consequential Loss Story

Authored by industry thought leader and expert, Joe Bermudez

When a Loss is covered under product contamination insurance or product recall insurance (PCI/PRI), the quantum at issue may be shared by the insured’s other triggered policies.  The Seventh Circuit’s recent decision in Berry Plastics Corporation v. Illinois Nat. Ins. Co., No. 17-1815, 2018 WL 4290733 (7th Cir. Sept. 10, 2018), raised a significant issue for PCI/PRI insurers regarding consequential damages and the extent of coverage under commercial general liability (CGL) policies.

Spoiler Alert: Defective Product at Issue

Berry, a global manufacturer of plastic packaging products, is headquartered in Evansville, Indiana. Berry manufactured a foil laminate product for its customer, Packgen.  Packgen, a small firm that produces specialized containers for industrial chemicals worked with its customer, CRI Catalyst Company (CRI), to develop a new type of intermediate bulk container (IBC).  CRI utilized the IBC to store and ship its chemical catalyst used in the refining of petroleum products.  Within seven months, Packgen was selling 1,261 IBCs a month to CRI and anticipated comparable sales within the foreseeable future.  Packgen also approached 37 petroleum refiners about using its innovative IBC.  About a year later, Packgen was notified of IBC failures and found that a large roll of foil laminate manufactured by Berry was defective.  CRI canceled all pending orders for the IBCs, destroyed its current IBC inventory, and refused to pay Packgen. 

In a subsequent suit, Packgen sued Berry and was awarded $7.2 million by a jury. The award consisted of $643,039.30 for the IBC’s shipped and destroyed and $6,563,607.00 for future lost profits.  Berry sued Illinois National Insurance Company (INIC), its excess liability insurer, because INIC refused to cover $6.2 million of the award, as it claimed the amount represented lost profits on IBCs that had yet to be ordered or manufactured.  Berry argued the $6.2 million resulted “because of property damage” caused by its product.

A Long but Informative Decision

The Seventh Circuit’s decision is chock full of great information, for coverage geeks (like us), but it’s a long and time-consuming read, and you have more important things to do.  So, we will break it down for you. 

An important initial note, the Court analyzed the issues under Indiana law, which is not any insurer’s favorite jurisdiction.

Critically, the Court began its analysis with this finding, “there is no language in Illinois National’s policy that on its face excludes any category of losses that are incurred ‘because of’ property damage”. Id. at *7.  In other words, the INIC policy could potentially cover more than just the actual property damage costs.  Based on its finding, the Court predicted, “the Indiana Supreme Court might well leave the door open to coverage of future losses, including lost profits and loss of good will, so long as the insured can establish a causal relationship between the property damage and those losses.”  Id.  On these bases, the Court framed the crux of the coverage issue, “[w]hether and to what extent Packgen’s losses were due to property damage, as opposed to the failure of Berry’s product to perform as promised”.  Id. at 10.

During its extensive analysis, the Court reviewed the two lines of jurisdictions addressing the extent of covered consequential damages under CGL policies.  The jurisdictions reflecting the more restrictive understanding, as advocated by INIC, ruled in similar vein to the California U.S. District Court’s decision in Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Ready Pac Foods, Inc., 782 F.Supp.2d 1047 (C.D. Cal. 2011).  The claim “for lost profits at the Taco Bell restaurants that were never shutdown during the E. coli investigation [i]s a claim for purely economic loss, and not a measure of property damage or personal injury suffered by Taco Bell and its customers.”  The Seventh Circuit found the cited “cases represent a narrow understanding of the losses that can be said to occur ‘because of’ property damage to the extent they exclude any anticipated losses on products not yet sold and produced.”  Id. at *7.

In citing to the line of jurisdictions, which favor a broader view of consequential damages under CGL policies, the Court deliberated over the following argument, “[o]nce the assessment of consequential losses extends beyond the profits lost on existing goods and sales already made to an estimate of the profits lost on future anticipated sales, it is arguably enforcing the commercial expectations of the injured party more so than remediating property damage.”  Id. at *7.   One of several decisions cited by the Court supported this argument, “excess liability policy covers consequential damages, including lost profits and diminution in value of company, which were result of property damage.”  Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d 398 (5th Cir. 2008).

In the end, the Court found against Berry because the jury in the underlying suit (Packgen v. Berry), “was not called upon to decide whether Berry’s defective product resulted in property damage, let alone whether the losses that Packgen suffered were ‘because of’ such damage.”  Id. at *10.

Takeaways

First and foremost, the companies discussed above are probably in the market for product recall insurance.

When a PCI/PRI Loss involves bodily injury or property damage, the CGL insurers may be liable for certain consequential damages.  In regard to this specific issue, the jurisdiction in play will be critical.  Do not assume the liability of the insured’s CGL policies is restricted to the actual bodily injury or property damage involved with the Loss.  Having handled hundreds of PCI/PRI claims, we can assist you with the coverage issues raised by these types of Loss considerations.

As the Seventh Circuit made abundantly clear, to be successful in allocating consequential damages with other insurers, support for the claim must be structured properly at the outset.  We can assist your quantum adjustment efforts so that the Loss is appropriately structured to assist with the proper allocation to each of the insured’s insurers.

Critically review your Other Insurance condition wording.  To be successful in sharing portions of the Loss with CGL insurers, your Other Insurance condition wording will be of the utmost importance.  As we always advocate, wording matters.  We have assisted our clients in developing successful wording, and we can assist you.

Thank you for your time and consideration.

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