Authored by industry expert, Joe Bermudez
What Just Happened?
The news is devastating. An insurer properly responds to its insured’s crisis and is later told it is SOL when it attempts to subrogate. We recommend the PCI Marketplace focus on the courts’ critical findings, review PCI wordings, and understand potential/resulting claim circumstances in order to get this right. Let’s discuss the decision, the issues raised, and how the PCI Marketplace is able to properly respond.
Setting the Stage
In SSL v. Mountaire Farms, Inc., No. 18-1818 (same as 666-yikes!), 2019 WL 1467052, April 3, 2019), the United States Court of Appeals, First Circuit set the stage perfectly, so we will let the Court begin the story,
This appeal concerns a suit in the District of Maine by the insurer of a chicken products manufacturer to recoup the losses that it paid to the manufacturer for the losses that the manufacturer incurred when its products were recalled following a salmonella outbreak. Subrogated to the rights of the manufacturer, the insurer sought damages from the manufacturer’s chicken supplier for claims under Maine law for breach of warranty and strict liability. In support of those claims, the insurer’s complaint alleged that the manufacturer received two truckloads of raw chicken from the supplier that was contaminated with Salmonella Enteritidis and was therefore ‘defective’ under Maine law. The supplier filed a motion to dismiss, which the District Court granted as to all claims. The District Court did so after ruling that the complaint’s allegations did not suffice to plausibly allege that the raw chicken that the supplier sent to the manufacturer was ‘defective’. The District Court also concluded that the insurer’s strict liability claim was independently barred by the economic loss doctrine. We affirm.
Generally, when a defendant files a motion to dismiss in response to a complaint, the court accepts the allegations contained in the complaint as true. And, a court’s analysis will focus on the facts as alleged within the four corners of the complaint. Because of these restrictions, courts usually do not grant motions to dismiss. Here, like the District Court, the First Circuit focused on the complaint’s allegations.
The Alleged Facts
Let’s quickly review the facts/allegations so that we are all on the same page. Mountaire Farms, Inc. (MFI) is a regional fresh/raw chicken producer. AdvancePierre Foods, Inc. (API), the insured, is a “national manufacturer of ‘value-added proteins and sandwich products’”. In February 2015 and under contract, MFI delivered 120,000 pounds of fresh boneless chicken to API’s Portland, Maine facility. “The fresh chicken” that API purchased from MFI was “contaminated with Salmonella Enteritidis at the time of delivery”. API used the chicken to produce value-added raw chicken products, like raw stuffed chicken breasts.
An outbreak involving individuals living in Minnesota and Wisconsin and infected with Salmonella Enteritidis was detected between February and June 2015. The outbreak was reported to FSIS on June 24, 2015. On July 1st, FSIS issued a public health alert. On July 2nd API initiated the first recall, and eventually recalled 1,707,494 pounds of raw chicken product produced between February and May 2015. API incurred losses in excess of $10 million. SSL reimbursed API for its losses covered within the PCI policy’s limits and subrogated to API’s rights.
Under Maine law, SSL sued MFI for breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose (breach of warranty claims), and strict product liability. In response, MFI filed a motion to dismiss for failure to state a claim.
A Critical Conclusion (foreshadowing the discussion)
Under Maine law, the underlying federal District Court concluded,
- “Salmonella is an inherent, unavoidable, and recognized component of raw chicken that is eliminated by proper cooking methods”.
- “The complaint failed plausibly to allege that the chicken from MFI was contaminated with any pathogen other than such salmonella”.
Based on these conclusions and for the reasons discussed above, the District Court dismissed the complaint. An appeal was subsequently filed with the First Circuit.
The First Circuit Presents an Unsurmountable Challenge
The First Circuit started its analysis by initially focusing on the breach of warranty claims. In addition to the woefully insufficient allegations contained in the complaint, SSL had to accept “under Maine law, raw chicken that contains salmonella that can be eliminated by proper cooking cannot be considered ‘defective’”. On these bases, the Court set a very high bar, which ultimately was unreachable:
Thus, SSL’s challenge to the dismissal of its claims may succeed only if the complaint plausibly alleges that the raw chicken that MFI sold to API was contaminated with a type of salmonella that would persist despite proper cooking. And, there, as we will explain, the complaint comes up short.
Ouch!
Three Strikes and the Complaint is Out (it is the start of baseball season)
In its decision, the Court relates the three arguments presented in support of the complaint’s allegations. The first two hold little interest (as to the motion to dismiss or for our purposes). The third argument is intriguing, but only from a PCI Marketplace perspective – it bombed with respect to the motion to dismiss.
Initially, the argument presented claimed that, FSIS determined the outbreak was severe enough to warrant a recall of API’s products, and, therefore the products were “adulterated” under U.S. food safety laws. Following this logic, the second part of the argument asserted, if the chicken products simply contained salmonella that anyone would expect to find in any chicken product, there was no basis for FSIS to determine the products were adulterated and to be recalled because they were unfit for human consumption. In other words, as the Court found, the argument relies upon the recall’s circumstances to make the case that the complaint’s allegations were sufficient. Yeah, the Court didn’t buy it either. Nevertheless, one could imagine such an argument being presented in an attempt to find coverage under PCI, so it is discussed here.
The Court explicitly rejected the assertion that a FSIS-supervised recall gives rise to the plausible inference that the type of salmonella found in API’s chicken could not be eliminated by proper cooking. “The fact of a recall might simply reflect that the FSIS linked particular chicken products to an outbreak of salmonella.” However, the Court cautioned that under certain circumstances a seller of raw chicken products may have recourse against a supplier of raw chicken “when the federal government determines that the supplied chicken is adulterated and warrants a massive Recall.” Nevertheless, as the Court ultimately found with respect to the complaint’s allegations,
[N]either the fact that the chicken from MFI was contaminated with Salmonella Enteritidis nor the fact that the products into which is was incorporated were linked to an illness outbreak permits the inference that the chicken from MFI was “defective” under Maine law.
On these bases, the Court affirmed the dismissal of the breach of warranty claims.
With respect to the strict product liability claim, the Court denied the claim on the same basis. Essentially, the complaint did not sufficiently plead facts that allowed the Court to plausibly infer that the type of salmonella found in the chicken MFI sold to API could not be eliminated by proper cooking. As the chicken was not defective, the strict product liability claim would not survive. (The Court did not address negligence because it was not asserted in the complaint against MFI.)
Raw Chicken, Salmonella, and PCI – A Marketplace Dilemma
As noted by the First Circuit, the District Court’s conclusion is critical to our discussion:
- “Salmonella is an inherent, unavoidable, and recognized component of raw chicken that is eliminated by proper cooking methods”.
Consider this conclusion with respect to the various Insured Event triggers contained in a PCI policy. This topic was discussed at last year’s London Roundtable event and this year’s North American Crisis Management Summit, and has also been thrashed about and debated on numerous occasions in smaller venues.
Accidental Contamination/Accidental Product Contamination
Based on the above conclusion, raw poultry and beef found with salmonella is not contaminated nor impaired and does not differ from its usual condition.
Unless some other pathogen, contaminant, or incident takes place during processing, manufacturing, or packaging, the initial AC/APC triggers remain unsatisfied.
The above conclusion also addresses proximate cause and is fatal to the satisfaction of the final trigger, the use or consumption results in or would result in bodily injury or property damage. U.S courts recognize that raw poultry and beef sold with salmonella is not defective and will only harm someone or something if not properly cooked.
Moreover, the Court’s decision puts a stake through the argument that the existence of a related outbreak and recall means an incident involving raw poultry or beef and salmonella is covered under PCI. Additionally, the impression that this issue will be addressed through regulatory means is also unavailing – lawyer-speak for: not gonna fly.
Adverse Publicity
While an argument could be made that certain AP wordings may respond to the circumstances presented here, it is unlikely to prevail. As most, if not all, AP wordings are dependent on the same triggers contained in the AC/APC definitions, it is unlikely a court would agree that the reporting implied the satisfaction of the same triggers. (U.S. courts have recognized, since 1974, that it is commonly known people do not eat raw poultry/beef.) However, each wording will have to be reviewed and considered under similar circumstances, so we will not completely close the door on this effort. Who doesn’t appreciate a little gray?
Governmental/Government Recall
Satisfaction guaranteed! Nope. Here is where brokers earn their keep. Some GR wordings will respond to the above circumstances, others certainly will not. Understanding the lessons provided by the Mountaire Farms decisions are critical.
Product Refusal
Just kidding, wanted to make sure you are awake and still reading.
Other Options?
Manuscript wordings are also an option, which means the Marketplace can deliver a solution.
Conclusion
The Mountaire Farms decisions will reverberate in the PCI Marketplace for quite a while. And, rightly so. The Marketplace should consider the issues raised, discussed, and addressed. A proper wording and claim circumstance review, examination, and discussion will leave all stakeholders happy and healthy.
Next PCI Challenge:
FDA public advisories can be addressed and covered under PCI policies without fatally exposing Markets.
Next PDI Challenge:
Properly handling silent cyber.