Hot Stuff Foods, LLC v. Hous. Cas. Co.

• Decision Date: 17 November 2014
• Docket Number: Nos. 14–1192,14–1194.,s. 14–1192
• Citation: Hot Stuff Foods, LLC v. Hous. Cas. Co., 771 F.3d 1071 (8th Cir. 2014)
• Parties: HOT STUFF FOODS, LLC, Plaintiff–Appellee/Cross–Appellant, v. HOUSTON CASUALTY COMPANY, Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

771 F.3d 1071

HOT STUFF FOODS, LLC, Plaintiff–Appellee/Cross–Appellant

v.HOUSTON CASUALTY COMPANY, Defendant–Appellant/Cross–Appellee.

Nos. 14–1192

14–1194.

United States Court of Appeals, Eighth Circuit.

Submitted: Sept. 23, 2014.

Filed: Nov. 17, 2014.

Alex M. Hagen, argued, (Stephen Landon, Sioux Falls, SD, Philip H. Hecht, Washington, DC, on the brief), for Plaintiff–Appellee/Cross–Appellant.

Terrence Reilly McInnis, argued, Irvine, CA, (William Fuller, Sioux Falls, SD, Ross Smith, Irvine, CA, on the brief), Defendant–Appellant/Cross–Appellee.

Before RILEY, Chief Judge, LOKEN and KELLY, Circuit Judges.

Opinion

LOKEN, Circuit Judge.

Hot Stuff Foods manufactures and sells consumer food products including Sausage Breakfast Sandwiches assembled at its processing facility in Shakopee, Minnesota.Hot Stuff uses sausage for the Sausage Breakfast Sandwiches that does not contain monosodium glutamate (MSG), a flavor enhancer that must be disclosed on a food product's label when it is an added ingredient.See21 U.S.C. § 343(i).Hot Stuff also distributes sausage that contains MSG from its facility in Sioux Falls, South Dakota.On January 7, 2011, Hot Stuff discovered it had inadvertently used Sioux Falls sausage in making Breakfast Sandwiches distributed from Shakopee after July 2010.As those products contained MSG not disclosed on the labels, they were “misbranded” under federal law.21 U.S.C. § 343(a)(1).Hot Stuff immediately reported the situation to representatives of the Food and Drug Administration and the U.S. Department of Agriculture.After discussions with both agencies, Hot Stuff conducted a voluntary recall of the mislabeled sandwiches.The recall encompassed 193,507 cases of Sausage Breakfast Sandwiches that Hot Stuff distributed between August 2010 and early January 2011.During the recall, Hot Stuff learned that approximately 40,000 cases of the mislabeled sandwiches remained in commerce.

At the time of the recall, Hot Stuff was insured under a Malicious Product Tampering/Accidental Product Contamination policy issued by Houston Casualty Company(HCC).HCC's policy defined “Accidental Product Contamination” as:

(1) any accidental or unintentional contamination, impairment or mislabeling ... during the manufacture ... labeling ... production or processing ... of the Named Insured's PRODUCTS (including their ingredients or components), or PUBLICITY implying such, or

(2) fault in design specification or performance ...

provided always that the consumption or use of the Named Insured's CONTAMINATED PRODUCT(S) has, within 120 days of such consumption or use, either resulted, or may likely result, in: (1) physical symptoms of bodily injury, sickness or disease or death of any person(s) and/or (2) physical damage to (or destruction of) tangible property....

Hot Stuff timely sought indemnification from HCC for losses sustained due to the recall.HCC denied coverage on the ground that the claim did not involve an “Accidental Product Contamination” as defined in the policy.Hot Stuff commenced this declaratory judgment action to recover its claimed loss.

The district court granted Hot Stuff's motion for partial summary judgment, concluding that the incident was a covered Accidental Product Contamination, Hot Stuff was entitled to indemnification of its covered losses, and the amount of damages required a jury trial.Hot Stuff Foods, LLC v. Houston Cas. Co.,No. 11–4055, 2012 WL 2675225(D.S.D.July 5, 2012).After a four-day trial, the jury awarded Hot Stuff $755,268.07 for recall and crisis response expenses and $200,000 for lost gross profit.HCC moved for judgment as a matter of law with regard to the lost gross profit award, and Hot Stuff moved for an award of attorney's fees under S.D. Codified Laws § 58–12–3 for HCC's vexatious refusal to pay.The district court denied both motions.HCC appeals the grant of partial summary judgment and the award of lost gross profit damages.Hot Stuff cross appeals the denial of attorney's fees.We reverse the grant of partial summary judgment, affirm on the remaining issues, and remand.

I.The Coverage Issue

“We review de novo a district court's interpretation of an insurance contract and its decision to grant summary judgment.”Patterson v. Mut. of Omaha Ins. Co.,743 F.3d 1160, 1163(8th Cir.2014).It is undisputed that (i) the Sausage Breakfast Sandwiches were mislabeled, and (ii) no one reported becoming ill from eating them.Therefore, the parties and the district court agreed that the determinative coverage question was whether consumption of Sausage Breakfast Sandwiches to which between 0.0638 grams and 0.1276 grams of MSG had been added “may likely result ” in “physical symptoms of bodily injury, sickness or disease [in] any person(s)”(emphasis added).

The parties filed cross motions for summary judgment on this issue.Hot Stuff argued that it need show only a possibility that consumption of one or more Sausage Breakfast Sandwiches containing that amount of MSG would cause physical injury or illness.HCC argued that Hot Stuff must show a probability such harm would result.The district court adopted Hot Stuff's interpretation of the coverage limitation.As a matter of plain meaning, the court reasoned, the words may and likely “essentially balance each other out and leave the impression that ‘may likely’ means that there is a chance that an illness or sickness will result.”Alternatively, the two words conflict, making the “may likely” term ambiguous.Resolving the ambiguity in favor of the insured, as South Dakota law requires, the court ruled that Hot Stuff need only show “a possibility or a slight chance” that “a person will experience physical symptoms of sickness as a result of ingesting MSG-filled sandwiches.”Reviewing the parties' conflicting expert opinions regarding the health effects of ingesting MSG, the court concluded that “Hot Stuff has brought forth sufficient scientific evidence to show that MSG could cause physical symptoms of illness or sickness in at least one person who is exposed to the mislabeled sandwich.”

A.Construing the Policy Language.The parties agree South Dakota law governs this issue.Under South Dakota law, the meaning of terms in an insurance policy is a question of law we review de novo.Opperman v. Heritage Mut. Ins. Co.,566 N.W.2d 487, 489–91(S.D.1997).“The goal of contract interpretation is to determine the parties' intent.”Tri–City Assocs., L.P. v. Belmont, Inc.,845 N.W.2d 911, 915(S.D.2014).Terms “must be read in the context of the agreement as a whole.”Goddard v. S.D. Pub. Assur. Alliance,687 F.3d 965, 968(8th Cir.2012).We have found no Supreme Court of South Dakota decision interpreting “may likely.”Thus, our task is to predict how that Court would resolve the issue.SeeAllstate Indem. Co. v. Rice,755 F.3d 621, 623–24(8th Cir.2014).

HCC's policy has separate coverage sections for Malicious Product Tampering and Accidental Product Contamination.In both sections, the first type of covered loss recited, and the type of loss defined in the greatest detail, is “Recall Expenses.”At least some general commercial liability policies exclude losses incurred because of a recall.SeeNetherlands Ins. Co. v. Main St. Ingredients, LLC,745 F.3d 909, 919(8th Cir.2014).The need to recall contaminated or adulterated product is a recognized risk of doing business in the heavily regulated food industry.Thus, the exclusion compels food companies such as Hot Stuff to purchase policies separately insuring against this risk.This no doubt explains why HCC's narrow commercial policy focused on the coverage of recall expenses, and why courts have had to resolve accidental product contamination coverage disputes in recent years.¹

Until 21 U.S.C. § 350l was enacted in 2011, neither FDA nor USDA had mandatory recall authority.But both agencies included voluntary recall in their enforcement arsenal, FDA by regulation, 21 C.F.R. §§ 7.41 –7.59, and USDA by Directive 8080.1 of the Food Safety and Inspection Service (Oct. 26, 2010).Food and drug companies that refuse to conduct an agency-recommended voluntary recall risk facing the agencies' draconian enforcement powers, such as product seizure and adverse publicity.While FDA and USDA focus first and foremost on public health and safety, both agencies also protect food consumers from unfair and deceptive marketing practices, such as improper labeling of food imports and non-disclosure of non-dangerous preservatives or flavorings.Violation of these labeling restrictions results in the product being “misbranded” or “adulterated,” in which case voluntary recall may be urged by the agencies or may be the company's least-costly remedy.In regulating voluntary recalls, FSIS Directive 8080.1 identified three Recall Classifications, “whether firm-initiated or requested by FSIS.”A Class III recall is “a situation where the use of the product will not cause adverse health consequences.”Here, Hot Stuff, the FDA, and USDA agreed that recall of the mislabeled Sausage Breakfast Sandwiches would be designated a Class III recall.

This brief (and necessarily incomplete) review of food industry regulation brings into focus why insurers and food industry insureds would agree to limit Accidental Product Contamination coverage to recall incidents in which consumption of the contaminated or mislabeled product “resulted, or may likely result” in physical symptoms of bodily injury, sickness or disease or death of any person.As other courts to consider this coverage have concluded, this “is not a recall insurance policy.”Ruiz,2012 WL 4050001, at *10;seeThe Limited,228 F.Supp.2d at 580.Covering voluntary recalls that have no direct relation to public health hazards would increase the cost of the insurance, extending coverage to voluntary actions that should remain part of an insured's cost of doing business.²

Construing the policy term “may likely result” in this light, we disagree with the district court...