Netherlands Ins. Co. v. Main St. Ingredients, LLC

• Decision Date: 18 March 2014
• Docket Number: No. 13–1316.,13–1316.
• Citation: 745 F.3d 909
• Parties: The NETHERLANDS INSURANCE COMPANY, a New Hampshire corporation, Plaintiff–Appellant v. MAIN STREET INGREDIENTS, LLC, a Wisconsin limited liability company, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

745 F.3d 909

The NETHERLANDS INSURANCE COMPANY, a New Hampshire corporation, Plaintiff–Appellant

v.MAIN STREET INGREDIENTS, LLC, a Wisconsin limited liability company, Defendant–Appellee.

No. 13–1316.

United States Court of Appeals, Eighth Circuit.

Submitted: Nov. 19, 2013.

Filed: March 18, 2014.

Suzanne Louise Jones, argued, Minneapolis, MN, for Appellant.

Lauren E. Lonergan, argued, Minneapolis, MN (Maren F. Grier, Michael H. Streater, on the brief), for Appellee.

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

RILEY, Chief Judge.

Malt–O–Meal Company (Malt–O–Meal) sued Main Street Ingredients, LLC (Main Street) in Minnesota state court, which suit involved the June 2009 voluntary recall of dried milk Main Street bought from Plainview Milk Products Cooperative (Plainview) and sold to Malt–O–Meal. The Netherlands Insurance Company (Netherlands) sued its insured, Main Street, in federal court, seeking a declaratory judgment as to whether Netherlands had a duty to defend or indemnify Main Street in the underlying lawsuit with Malt–O–Meal. The district court ¹ granted partial summary judgment in favor of Main Street and denied summary judgment for Netherlands, declaring that under the relevant policy, Main Street had established a prima facie case of coverage to which no exclusion applied. Netherlands appeals. Having appellate jurisdiction under 28 U.S.C. § 1291, we affirm.

I. BACKGROUNDA. Facts

In 2007, Plainview sold dried milk to Main Street, which, in turn, sold Plainview's dried milk to Malt–O–Meal. Malt–O–Meal incorporated the dried milk into its instant oatmeal products.

Also in 2007, Main Street purchased a commercial liability insurance policy from Netherlands, and in 2008, Main Street purchased an extension of the policy (collectively, the policy).

In June 2009, the United States Food and Drug Administration (FDA) found Salmonella bacteria on food-contact surfaces and in areas used to manufacture dried milk products in Plainview's plant. The FDA also observed thirteen instances of insanitary conditions in the plant. See21 U.S.C. § 342(a)(4) (deeming food “prepared, packed, or held under insanitary conditions” to be “adulterated”). On June 23, 2009, Plainview issued a product recall notice (notice) announcing a “voluntary recall” of dried milk produced by Plainview in 2007, 2008, and 2009, and stating its dried milk had “the potential to be contaminated with Salmonella.” Plainview's notice stated, in part:

Because of the seriousness of this situation, this recall extends to the user level. This means that ALL levels of distribution down to the end user need to be notified. We recommend including a copy of this recall letter to all downstream consignees who may have received these recalled products.

If you or your customers have repacked any of the recalled products, the FDA then considers the repacked products to be a “NEW” product for which the re-packer will be responsible to recall. Anyone who has repacked our products should contact their local FDA district office to discuss the need to initiate a recall of the repacked product.

If you or your customers have used our products as an ingredient of another food ..., FDA considers this a “NEW” products [sic] for which the manufacturer will be responsible to recall. Anyone who has used our products as an ingredientshould contact their local FDA district office to discuss the need to recall.

Main Street forwarded the notice to Malt–O–Meal, stating the dried milk had “the potential to be contaminated with Salmonella.” As a result, Malt–O–Meal recalled its instant oatmeal that contained the recalled dried milk.

On August 18, 2009, the FDA sent a letter to Plainview responding to Plainview's submission of a reconditioning plan to address the FDA's findings at Plainview's facility. The FDA stated,

Your firm is responsible for developing a reconditioning plan that corrects and removes the conditions that caused the recalled, nonfat dry milk to be adulterated. These conditions pertain not only to the product itself, but also to the environment found within the facility in which the product was prepared, packed or held, and the practices that may have led to the adulteration.

(Emphasis added).

B. Procedural History

In October 2009, Malt–O–Meal sued Main Street and Plainview in Minnesota state court (underlying action). As to Main Street, Malt–O–Meal asserted claims of strict products liability, breach of express warranties, breach of implied warranties of merchantability and fitness for a particular purpose, and breach of contract, all based upon the loss of the instant oatmeal containing the dried milk. In July 2010, pursuant to the policy, Netherlands hired counsel to defend Main Street in the underlying action, but did “so under a reservation of rights since coverage may not apply to some or all of the allegations against [Main Street].”

In March 2011, Netherlands sued Main Street and Malt–O–Meal ² in federal court seeking a declaration it had no duty to defend or indemnify Main Street as to the claims in the underlying action.

In May 2012, in the underlying action, the Minnesota state court granted Main Street's motion for summary judgment on the strict liability claim, but denied the motion on the remainder of the claims. A month later, Malt–O–Meal and Main Street settled the remaining claims for $1,400,000.

In this federal case, the district court granted Main Street's motion for partial summary judgment and denied Netherlands' motion for summary judgment. The parties stipulated to entry of final judgment, and the district court awarded $1,400,000, plus interest, to Main Street. Netherlands timely appealed.

II. DISCUSSIONA. Standard of Review

“On appeal, we review a district court's decision on cross-motions for summary judgment de novo.” Harleysville Ins. Co. v. Physical Distribution Servs., Inc., 716 F.3d 451, 457 (8th Cir.2013) (quoting Dunn v. Aamodt, 695 F.3d 797, 799 (8th Cir.2012) (internal marks omitted)). A district court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “We ... review a district court's interpretation of the contractual provisions of an insurance policy de novo as a question of law.” Noran Neurological Clinic, P.A. v. Travelers Indem. Co., 229 F.3d 707, 709 (8th Cir.2000).

B. Choice of Law

Despite initial questions whether Wisconsin or Minnesota law should apply, the district court found “no conflict between Minnesota and Wisconsin law on any determinative issue” and applied Minnesota law.³ Because the parties do not dispute the choice of Minnesota law, we assume, without deciding, Minnesota law applies, and we apply substantive Minnesota law to this diversity action, consulting Wisconsin law as persuasive authority when appropriate. See Progressive N. Ins. Co. v. McDonough, 608 F.3d 388, 390 (8th Cir.2010) (“Minnesota law applies, as Minnesota is the forum state and neither party has raised a choice-of-law claim.”). “We must predict how the Supreme Court of Minnesota would rule, and we follow decisions of the intermediate state court when they are the best evidence of Minnesota law.” Friedberg v. Chubb & Son, Inc., 691 F.3d 948, 951 (8th Cir.2012).

C. Potential vs. Actual Liability

An initial difficulty with this case lies in the fact the underlying action was not concluded with a finding of liability or non-liability. Main Street and Malt–O–Meal settled after the state court denied Main Street summary judgment on most of Malt–O–Meal's claims.⁴ But under Minnesota law, “[l]iability need not be in the form of a verdict—a [reasonable and prudent] settlement can trigger the duty to indemnify.” Jackson Nat'l Life Ins. Co. v. Workman Sec. Corp., 803 F.Supp.2d 1006, 1012 (D.Minn.2011) (citing Miller v. Shugart, 316 N.W.2d 729, 735 (Minn.1982) (en banc)). Where the underlying action settles before trial, “[t]he party seeking indemnification need only show it could have been liable under the facts shown at trial not whether they would have been.” Id. (citing Osgood v. Med., Inc., 415 N.W.2d 896, 903 (Minn.Ct.App.1987)). The district court properly stated that in order for Main Street to prevail, a finding of potential liability in the underlying action is enough, rather than a finding of actual liability.

At the same time, the district court added the proviso that the settlement terms must include claims of the insured that enjoyed actual coverage in the insurer's policy; potential coverage would not be enough, because the insurer only contracted to defend and indemnify claims that are actually covered. “[T]he settlement in the underlying action [must] include [ ] claims for risks [the insurer] agreed to assume.” St. Paul Fire & Marine Ins. Co. v. Nat'l Chiropractic Mut. Ins. Co., 496 N.W.2d 411, 415 (Minn.Ct.App.1993); accord Gulf Ins. Co. v. Skyline Displays, Inc., 361 F.Supp.2d 986, 990 (D.Minn.2005) (“In the circumstances of this case, the court asks whether the settlement included claims for risks [the insurer] agreed to assume.”). “In other words, an insurer's duty to indemnify arises only if the insured ultimately proves up facts showing coverage.” Nelson v. Am. Home Assur. Co., 824 F.Supp.2d 909, 915 (D.Minn.2011), aff'd, 702 F.3d 1038 (8th Cir.2012).

D. Analysis of the Policy

Substantively, Netherlands argues it has no duty to indemnify Main Street because (1) the dried milk did not suffer “property damage,” and (2) the sale of the dried milk to Malt–O–Meal was not an “occurrence,” as defined by the policy. In the alternative, Netherlands argues three policy exclusionsapply, relieving Netherlands of any duty to indemnify Main Street.

“It is well-established that general contract principles govern the construction of insurance policies, and that insurance policies are to be interpreted to give effect to the intent of the parties.” Thommes v. Milwaukee Ins. Co., 641...