Honeybaked Foods Inc. v. Affiliated Fm Ins. Co.

• Decision Date: 02 December 2010
• Docket Number: Case No. 3:08CV01686.
• Citation: 757 F.Supp.2d 738
• Parties: HONEYBAKED FOODS, INC., Plaintiffv.AFFILIATED FM INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Ohio

757 F.Supp.2d 738

HONEYBAKED FOODS, INC., Plaintiff

v.AFFILIATED FM INSURANCE COMPANY, Defendant.

Case No. 3:08CV01686.

United States District Court, N.D. Ohio, Western Division.

Dec. 2, 2010.

Alan G. Starkoff, Amanda L. Wickline, Jeremy M. Grayem, Schottenstein, Zox & Dunn, Columbus, OH, for Plaintiff.Richard D. Gable, Jr., Sean P. Mahoney, Thomas S. Brown, Jennifer L. Seme, Gibbons, Philadelphia, PA, Michael G. Sanderson, Nathan A. Hall, Stephen A. Rothschild, Shumaker, Loop & Kendrick, Toledo, OH, for Defendant.

ORDER

JAMES G. CARR, District Judge.

This is an insurance coverage case. Following the discovery of a pathogenic bacterium in several production runs of its ham and turkey products, plaintiff HoneyBaked Foods, Inc., claimed a loss of about $8 million under its “all-risk” policy with defendant Affiliated FM Insurance Company. Affiliated FM denied the claim, asserting that exclusions under the policy leave HoneyBaked without coverage for any part of the loss. HoneyBaked filed a complaint seeking a declaratory judgment of its rights under the policy, and alleging breach of contract and bad faith. Jurisdiction is proper under 28 U.S.C. § 1332.

Pending are counter-motions for summary judgment on the declaratory judgment and breach of contract claims. [Docs. 35, 41]. For the following reasons, the defendant's motion is granted in part, and the parties are directed to propose a question or questions for certification to the Ohio Supreme Court regarding whether, notwithstanding the failure of the policy at issue otherwise to cover the plaintiff's loss, such loss might be covered, contingent on jury findings of disputed facts, under Ohio law.

Background

1. HoneyBaked's Operations

HoneyBaked is a meat and poultry processor that processes cooked spiral sliced hams and turkey breasts at a facility in Holland, Ohio. As of November, 2006, HoneyBaked processed the cooked hams and turkeys from its suppliers by unpacking them, applying a glaze and then repackaging and freezing them for shipment to customers. The processing operations included a conveyor system equipped with hollow rollers to transport food products within the facility.

HoneyBaked is subject to routine inspection by the Food Safety and Inspection Service (FSIS), part of the United States Department of Agriculture (USDA).

2. Discovery of Listeria Monocytogenes and Resulting Claims

In early November 2006, the FSIS informed HoneyBaked that a sample from HoneyBaked's October 30, 2006, production run ¹ had tested positive for listeria monocytogenes (listeria). Listeria is a pathogenic bacterium that causes listeriosis, an uncommon but potentially fatal disease. HoneyBaked hired Silliker Laboratories to test samples from the surrounding production dates. When HoneyBaked learned that surrounding production runs tested presumptively positive for listeria as well, it suspended its operations.

HoneyBaked also notified FSIS that some product from these production runs had already been introduced into commerce and purchased by consumers. FSIS concluded that a recall was not necessary at this point.

HoneyBaked worked with Dr. Joseph Cordray of Iowa State University to investigate how the listeria came into contact with the food products. Dr. Cordray and others identified the hollow roller of the conveyor system as the likely source of listeria. Further inspection revealed a sludgelike substance in the hollow roller. This substance tested positive for listeria. Ribo-typing ² confirmed that the listeria discovered in the hollow roller matched the listeria found on the food products.

HoneyBaked immediately ceased use of the conveyer system and removed it from the facility. HoneyBaked also engaged in extensive cleaning and sampling procedures. After reviewing its policies and procedures, HoneyBaked resumed production.

On November 17, 2006, HoneyBaked pulled samples from production dates ranging from September 11, 2006 through October 17, 2006 to be tested by Silliker Laboratories. One turkey product and ninety-three ham products tested positive for listeria. HoneyBaked began a voluntary recall of the 46,941 pounds of fully cooked ham and turkey products produced between September 5, 2006 and November 6, 2006 that had been introduced into commerce.

The FSIS issued a notice of ineffective recall, and HoneyBaked suspended production again on November 29, 2006. HoneyBaked resumed production on December 9, 2006.

Ultimately, HoneyBaked recovered only 5,674 pounds of product. An additional 989,207 pounds of product remained segregated in HoneyBaked's freezers.

In early August, 2007, HoneyBaked informed Affiliated FM that it planned to dispose of the nearly one million pounds of remaining product from the affected production runs. Soon after, HoneyBaked deposited the product in a local landfill, retaining one sample from each production date for further testing if necessary.

In November 2006, during the listeria investigation, HoneyBaked provided notice of its potential claim to Affiliated FM. HoneyBaked eventually submitted an insurance claim to Affiliated FM seeking reimbursement for the value of the disposed food products and additional losses resulting from the business interruptions.

3. The All–Risk Policy

HoneyBaked had purchased an all-risk insurance policy from Affiliated FM covering the period of April 1, 2006 through April 1, 2007. There is no dispute that HoneyBaked paid all required premiums and that the policy was in effect at the time HoneyBaked discovered the listeria in its production runs.

The policy insures against direct physical loss or damage to real property and personal property and provides recovery for damages sustained during periods of business interruption, except where excluded. Specifically, the policy states:

A. PERILS INSURED

This policy insures against all risks of direct physical loss or damage to insured property except as excluded under this policy.

[Doc. 35–14, at 11].

The policy sets forth two groups of exclusions:

F. PERILS EXCLUDED

GROUP I. This policy does not insure against the loss or damage caused directly or indirectly by or resulting from any of the following. Loss or damage is excluded regardless of any other cause or event whether or not insured under this policy that contributes concurrently or in any sequence to the damage.

* * *

11. Fungus, mold or mildew, except as provided in Section D., Extensions of Coverage, Item 18.

* * *

GROUP II. This policy does not insure against loss or damages caused by the following; however, if direct physical loss or damage insured by this policy results, then that resulting direct physical loss or damage is covered.

1. Defects in materials, faulty workmanship, faulty construction or faulty design.

2. Loss or damage to stock or materials attributable to manufacturing or processing operations while such stock or materials are being processed, manufactured, tested, or otherwise being worked upon.

* * * 5. Contamination, including but not limited to pollution.

[Doc. 35–14, at 25–27].

Item 18 under “Extensions of Coverage” provides specific coverage for fungus, mold and mildew:

This policy is extended to cover the direct physical loss or damage to insured property caused by or resulting from fungus, mold or mildew, when fungus, mold or mildew is the direct result of direct physical loss or damage insured by this policy. This coverage includes any costs or expense to clean up, remove, contain, treat, detoxify or neutralize fungus, mold or mildew from insured property resulting from such loss or damage.

[Doc. 35–14, at 21].

The policy defines the phrase “fungus, mold or mildew” as “fungus, including but not limited to, mildew and mold; protist; wet rot; dry rot; or bacterium; or chemical matter or compounds produced or released by such fungus, protist, wet rot, dry rot, or bacterium.” [Doc. 35–14, at 38].

The policy also contains a separate endorsement for business interruption coverage, which states:

1. COVERAGE PROVIDED:

In consideration of additional premium, this policy is extended to cover the actual loss sustained by the Insured due to the necessary interruption of production or business operations or services during the period of interruption of the following:

A. Gross Earnings, Rents, and Expenses to Reduce Loss; and

B. Extra Expense;

Directly resulting from direct physical loss or damage, of the type insured by this policy to property not otherwise excluded, utilized by the insured, and at a location, but only to the extent the Insured is able to make up production and resume or continue operations or services, partially or entirely, by utilizing damaged or undamaged property all whether or not at a location(s).

[Doc. 35–14, at 41].

4. Denial of Claim and Resulting Litigation

On February 20, 2008, Affiliated FM informed HoneyBaked that it would not cover any part of HoneyBaked's claim. In a March 4, 2008 letter, Affiliated FM explained that presence of listeria itself was not a physical loss or damage, and that it denied coverage for the product loss based on exclusions in the policy. Affiliated FM explained that it denied coverage of the business interruption losses, stating that because “there is no covered physical loss or damage, any business interruption associated with the listeria contaminated product ... is also not covered.” [Doc. 41, at 20].

Following the denial of its claims under the policy, HoneyBaked sued Affiliated FM, seeking declaratory judgment of its rights under the policy and alleging that Affiliated FM had breached the contract and acted in bad faith in denying the claim. Affiliated FM filed a motion for partial summary judgment on the declaratory judgment and breach of contract claims, and HoneyBaked answered with a counter-motion for partial summary judgment on the same claims.

Standard of Review

A party is entitled to summary judgment on motion under Fed.R.Civ.P. 56 where the opposing party fails to show the existence of an essential element for...