United States: Hunton Retail Law Resource Blog: Recall Roundup: October 2018

October began with a CPSC announcement that a major retailer agreed to pay a $3.85M civil penalty for failing to report that a trash can it sold contained a defect or created an unreasonable risk of serious injury. The retailer sold 367,000 of the trash cans nationwide between December 2013 and May 2015. Allegedly the trash can's plastic collar may dislodge, exposing a sharp edge and posing a laceration hazard to consumers. The retailer received 92 consumer complaints about this alleged defect but did not immediately notify the CPSC of the defect. The CPSC announced a recall of the trash can in July 2015. In addition to the civil penalty, the retailer agreed to maintain a compliance program and a system of internal controls and procedures to ensure it discloses information to the CPSC in accordance with applicable law. The Commission voted unanimously (4-0) to accept the settlement.

With this civil penalty, the CPSC has assessed four civil penalties in 2018 for a record-breaking total of $37.6M. The prior record was established in 2016, when the CPSC collected $37.3M via six civil penalties. With two months left in the calendar year, the 2018 total for civil penalties may further increase. This civil penalty also marks the first multi-million dollar civil penalty since the recent change in political make-up of the Commission from a majority of Democratic appointees to a majority of Republican appointees. This suggests that regardless of the political make-up of the Commissioners, the agency will not abandon use of the civil penalty as part of its enforcement arsenal when presented with convincing evidence that a manufacturer, distributor or retailer failed to comply with legal reporting requirements.

October's most noteworthy recall involved pressure-assisted flushing systems — a key component for flushing toilets. The system "can burst at or near the vessel weld seam releasing stored pressure." This released pressure can lift the tank's lid and/or shatter the tank, posing a serious laceration hazard. The manufacturer has received over 1,400 reports of the systems bursting, injuring 23 consumers and causing over $700,000 in property damage. In response, the manufacturer recalled 1.4 million units. This is recall adds to the manufacturer's prior recalls of similar systems in June 2012, January 2014 and July 2016.

Attorneys from Hunton Andrews Kurth LLP's Insurance Coverage practice group weigh in on two contamination and recall insurance disputes.

In Lake Country Foods' case (previously discussed in the May Recall Roundup), the insurer has filed counterclaims against Lake Country Foods ("LCF") seeking reimbursement of the approximately $1.2 million advance payment it made in connection with an alleged salmonella contamination incident at one of LCF's facilities. LCF had sought an order permitting it to keep $1.2 million already paid by the insurer and requiring the insurer to provide coverage for the product contamination claim. In response, the insurer has raised numerous defenses disputing any obligation to provide coverage and has also filed counterclaims against LCF seeking to void the policy and order LCF to return the $1.2 million advance payment. In support of these claims, the insurer asserts that LCF was aware of the salmonella contamination and adverse FDA inspection reports at the time it submitted an application stating it had no knowledge of circumstances that may lead to an insured loss, and that its facilities had not been the subject of regulatory recommendations or complaints. The insurer alleges that had LCF not concealed the truth, it would have not made the advance payment and would have been justified in denying the claim in full under the policy. We will continue to monitor the case for further developments.

In Amalgamated Sugar Co. v. The Cincinnati Insurance Co., Amalgamated Sugar Co. ("Amalgamated"), the second-largest sugarbeet processor in the United States, filed a coverage lawsuit against its commercial general liability insurer seeking to recover more than $1 million in losses sustained by customers that received contaminated sugar products. Amalgamated alleges that it entered into a written agreement with a company (D&S Ingredient Transfer Company, Inc., or "D&S") to process and deliver Amalgamated's sugar products to customers. In October 2014, Amalgamated discovered during quality control testing that the sugar products that D&S processed and delivered to Amalgamated's customers had become contaminated with excess amounts of chlorine. While not dangerous or hazardous, the produced were irreparably damaged, could not be sold to consumers, and were destroyed. Three customers demanded that Amalgamated compensate them for more than $1 million in losses they incurred due to the damaged sugar shipments, including the cost of the sugar they purchased, processing their products with the damaged sugar, disposing of the damaged sugar products and remediating their contaminated facilities.

Amalgamated provided notice of a claim under its commercial general liability and umbrella policies issued by Cincinnati, asserting that Cincinnati was obligated to provide coverage for property damage under various coverage parts, including property damage resulting from "your work." Cincinnati acknowledged the claim and funded and controlled an arbitration against D&S related to its role in processing and distributing the contaminated products. Amalgamated alleges that for the next several years, Cincinnati continued to acknowledge partial coverage for the claim by pursuing the arbitration against D&S, but in October 2018 "reversed course" and denied coverage only one month before the arbitration hearing. Due to Cincinnati's withdraw of coverage, Amalgamated brought a lawsuit asserting claims for breach of contract, bad faith and declaratory judgment on the grounds that it was entitled to coverage for the claim, and that Cincinnati denied coverage "at the eleventh hour" and "disingenuously and in bad faith blamed Amalgamated for the fact that its customers unilaterally addressed their claims by taking offsets to amounts they owe Amalgamated after [Cincinnati] did nothing to resolve Amalgamated's liability." Amalgamated asserts that Cincinnati was entirely focused on shifting its own responsibilities for resolving liability onto D&S and its insurer, thereby placing its own interests ahead of its insured, Amalgamated.

Total Recalls: 33

Hazards: Fire/Burn/Shock (11); Fall (6); Injury (3); Laceration (3); Crash (3); Violation of Federal Standard (2); Drowning (2); Choke (1); Strangulation (1); Risk of Head Injury (1)

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