General Mills, Inc. v. Gold Medal Ins. Co.

• Decision Date: 06 February 2001
• Docket Number: No. C2-00-1428.,C2-00-1428.
• Citation: 622 N.W.2d 147
• Parties: GENERAL MILLS, INC., a Delaware corporation, Respondent, v. GOLD MEDAL INSURANCE COMPANY, Appellant.
• Court: Minnesota Court of Appeals

622 N.W.2d 147

GENERAL MILLS, INC., a Delaware corporation, Respondent, v. GOLD MEDAL INSURANCE COMPANY, Appellant.

No. C2-00-1428.

Court of Appeals of Minnesota.

February 6, 2001.

Review Denied April 17, 2001.

Lawrence Zelle, Lawrence Hofmann, Zelle, Hofmann, Voebel & Gette, LLP, Minneapolis, MN, (for respondent).

Richard P. Mahoney, Victor E. Lund, Mahoney, Dougherty and Mahoney, Minneapolis, MN; and Stephen A. Cozen, Richard M. Mackowsky, Cozen and O'Connor, Philadelphia, PA, (for appellant).

Considered and decided by ANDERSON, Presiding Judge, KLAPHAKE, Judge, and HARTEN, Judge.

OPINION

KLAPHAKE, Judge

Appellant challenges summary judgment entered against it, finding insurance coverage for losses suffered by respondent and denying appellant a setoff against other insurance. Because we conclude as a matter of law that there was direct physical loss to insured property as required by terms of the policy, and because the exclusions from coverage relied on by appellant are ambiguous, we affirm the decision of the district court. Because the district court did not err in its application of the law regarding setoffs, we affirm as to that issue as well.

FACTS

Respondent General Mills, Inc. (General Mills), is a Delaware corporation with executive offices in Minnesota. Appellant Gold Medal Insurance Co. (Gold Medal), a Minnesota corporation and wholly-owned subsidiary of General Mills, was established by General Mills as a captive insurer for the purpose of accessing insurance markets in a cost-effective manner. Because Gold Medal has no actual employees, American Risk Management (ARM), an independent company that specializes in such work, handles its essential services. ARM drafted the wording of the Gold Medal insurance contracts that were issued to General Mills, although General Mills had considerable bargaining power with respect to the terms of the various policies.

This matter involves two insurance policies. The first policy, a Named Peril/Grain Stocks policy (named-peril policy), provided coverage for General Mills' grain storage facilities at Duluth and Superior, as well as other storage facilities. The second, the All Risk Property Policy (all-risk policy) covered all real and personal property of General Mills at named locations, but did not include the Duluth and Superior storage facilities. The limit of coverage for the named-peril policy was $65,576,000, and for the all-risk policy was $3,276,890,000.

In 1993-94, General Mills hired George Roggy, an independent contractor, to treat its grain stocks in Duluth and Superior with an FDA-approved pesticide, Reldan. Unbeknownst to General Mills, Roggy substituted the cheaper, but unapproved, pesticide Dursban. Although Reldan and Dursban are chemically almost identical, and although Dursban was approved for treatment of other foods, Dursban was not approved for use on oats. The FDA treats the presence of an unapproved chemical as an illegal adulteration of food products, even if not dangerous for human consumption; the fact that Dursban was not approved for application on oats was sufficient to violate FDA regulations on adulteration of food products.

In a routine inspection, the FDA discovered traces of Dursban in oat stocks at one of General Mills' facilities and traced it to the Fridley plant.¹ Upon notification, General Mills immediately halted distribution and production of oat products, but some of the adulterated oat stocks had already been milled into oat flour and converted to finished product, and other adulterated oat stocks had been mixed with unadulterated stock. By the time the problem was uncovered, 16 million bushels of raw oats and the equivalent of 55 million boxes of Cheerios and other oat-based cereals had been affected. To remove all traces of Dursban, all machinery at the milling plants had to be disassembled, cleaned, and reassembled.

There is little dispute that Dursban presented no health hazard to the consuming public. However, General Mills voluntarily held the adulterated cereals, based on the understanding that the FDA would order it to do so if General Mills attempted to distribute the product. General Mills considered petitioning the FDA for a waiver that would permit distribution of the cereals, but concluded that the matter could not be resolved in a timely fashion. Even if the FDA eventually granted a waiver, General Mills product freshness deadlines could not have been met. Instead, General Mills discarded all adulterated products. General Mills was also faced with a public relations problem, as news of the pesticide adulteration became public. The parties stipulated that General Mills' losses, including destruction of oat stocks and finished products and cleaning costs, were $167,542,874, plus interest and costs.

General Mills sought coverage for its losses under the all-risk and named-peril policies purchased through Gold Medal, and under another policy, the National Union Malicious Product Tampering Policy (National Union policy), purchased through a New York insurer. Coverage was denied under all three policies. A declaratory judgment action filed in New York over the National Union policy was eventually settled for $17.5 million, without an admission of coverage. General Mills also brought this breach of contract suit against Gold Medal for coverage under its two policies.

On a motion for summary judgment, the district court held that the losses were covered under the all-risk policy, but not covered under the named-peril policy. Further, the district court found no basis for a setoff against the National Union policy. Appellant Gold Medal appeals from the judgment finding coverage and denying a setoff.

ISSUES

I. Did the district court err in concluding that General Mills had suffered a direct physical loss of insured property?

II. Did the district court err in concluding that General Mills' loss was not excluded from coverage under the policy exclusions?

III. Did the district court err in concluding that Gold Medal was not entitled to a setoff because of other insurance?

ANALYSIS

"On an appeal from summary judgment, we must examine two questions, whether there are any genuine issues of material fact and whether the lower courts erred in their application of the law." Cummings v. Koehnen, 568 N.W.2d 418, 420 (Minn. 1997) (citation omitted). "A reviewing court must view evidence in the light most favorable to the party against whom summary judgment was granted." Vetter v. Security Continental Ins. Co., 567 N.W.2d 516, 520 (Minn.1997) (citation omitted). Both parties agree that there are no genuine issues of material fact.

The construction of an insurance contract is a question of law determined de novo by the reviewing court. Jenoff, Inc. v. New Hampshire Ins. Co., 558 N.W.2d 260, 262 (Minn.1997). As a question of law, interpretation of an insurance contract may be decided by the district court on a motion for summary judgment. American Nat'l Fire Ins. Co. v. Cordie, 478 N.W.2d 531, 533 (Minn.App.1991).

In construing an insurance contract, the intention of the parties is the overriding concern, to be determined by the language of the entire contract. Bobich v. Oja, 258 Minn. 287, 294, 104 N.W.2d 19, 24 (1960). Endorsements and exclusions must be construed in terms of the entire contract, and in such a way, if possible, to give effect to all provisions. Id. at 294-95, 104 N.W.2d at 24-25. Language is to be given its plain and ordinary meaning. Id. at 294, 104 N.W.2d at 24.

Where an insurance contract is ambiguous, the court applies the doctrine of contra proferentem, by which ambiguities in a document are to be construed unfavorably to the drafter or in favor of coverage. Black's Law Dictionary 328 (7th ed.1999). The court may not create an ambiguity where none exists. Bobich, 258 Minn. at 294, 104 N.W.2d at 24. Relatively equal bargaining power does not preclude application of the doctrine of contra proferentem. St. Paul Fire & Marine Ins. Co. v. MetPath, Inc., 38 F.Supp.2d 1087, 1092 (D.Minn.1998)

; see, e.g., SCSC Corp. v. Allied Mut. Ins. Co. 536 N.W.2d 305, 315 (Minn.1995); Minnesota Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 180-81 (Minn.1990); Northwest Airlines, Inc. v. Globe Indem. Co., 303 Minn. 16, 26, n. 2, 225 N.W.2d 831, 837 n. 2 (1975).

I. Physical Damage to Property

The all-risk policy provides coverage against "`All Risks' of direct physical loss or damage to property insured and described herein." There is no definition of "direct physical loss or damage" included in the policy. Gold Medal argues that the district court erred in finding a direct physical loss, because Dursban did not render the oats and products unfit for human consumption; the loss occurred only because of government regulation, and not because of direct damage to the insured property.

In an "all-risk" policy, coverage usually extends to

risks not usually covered under other insurance, and recovery under an "all-risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

13A George J. Couch, Couch on Insurance § 48:141 (2d ed.1982).

We have previously held that direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that insured property is injured in some way. Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn.App. 1997). In Sentinel, we noted that the function of a residential apartment building, to provide safe housing, was seriously impaired or destroyed by the presence of asbestos fibers, although the building itself did not suffer a "tangible injury." Id. Likewise, the function of the food products produced by General Mills is not only to be sold, but to be sold with an assurance that they meet certain regulatory standards. When General Mills is...