In HoneyBaked Foods, Inc. v. Affiliated FM Ins. Co., No. 08-1686, 2010 U.S. Dist. LEXIS 127502 (N.D. Ohio Dec. 2, 2010), the U.S. District Court for the Northern District of Ohio ordered Affiliated FM Insurance Company and HoneyBaked Foods to submit proposed questions of law to be certified to the Ohio Supreme Court regarding whether Ohio law recognizes the "reasonable expectations doctrine." Unable to reach consensus, the parties submitted competing proposed statements to the court on January 14, 2011.
The coverage dispute arose out of HoneyBaked's claim for coverage under a first-party policy for losses arising out of a food recall. In November of 2006, the USDA's Food Safety and Inspection Service informed HoneyBaked that it discovered listeria in a sample product from an October 30, 2006 production run. By the time HoneyBaked had concluded its own investigation and corrected its operations, it had recalled nearly 47,000 pounds of fully cooked ham and turkey products, destroyed nearly one million pounds of inventory, and lost several days of production in November and December.
HoneyBaked made a claim under an all-risk policy issued by Affiliated FM that was in effect during the recall period. HoneyBaked estimated that it suffered more than $8 million in property loss and business interruption. Affiliated denied coverage based on various policy exclusions, causing HoneyBaked to sue Affiliated in Ohio federal district court.
The parties cross-moved for summary judgment on the critical coverage issues. Specifically, Affiliated argued that two of the Group II exclusions – the manufacturing and processing operations exclusion and the contamination exclusion – precluded coverage. The introductory language for the Group II exclusions stated that:
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.
HoneyBaked argued that the "however" qualifier effectively eliminated the exclusion altogether, or at least rendered the Group II exclusions ambiguous. The court acknowledged that the language was "awkward," but it constituted an unambiguous "ensuing loss" provision that merely reaffirmed coverage for secondary losses caused by the excluded events.
While the Group II exclusions as a whole could not be considered ambiguous, the court found the language of the "manufacturing and processing operations" exclusion "baffling" and refused to find that it excluded coverage. However, the court also found that the contamination exclusion was clear and unambiguous and precluded coverage for HoneyBaked's losses. The exclusion stated:
This policy does not insure against loss or damages caused by [contamination, including but not limited to pollution]; however, if direct physical loss or damage insured by this policy results, then that resulting direct physical loss or damage is covered.
The policy defined "pollution" as including bacteria. The court determined that the presence of listeria in HoneyBaked's food products fit within the unambiguous definition of "contamination." The court also rejected HoneyBaked's argument that the exclusion applied to loss "caused by" contamination, as opposed to contamination damage. Using HoneyBaked's logic, the exclusion would not apply because the loss was caused by the hollow roller in HoneyBaked's production line that allowed the listeria to spread. The court rejected the distinction HoneyBaked attempted to make, holding that "the only preceding cause of the contamination was contamination."
Alternatively, HoneyBaked argued that Affiliated should provide coverage pursuant to the reasonable expectations doctrine because HoneyBaked had a reasonable expectation when it purchased the policy that a loss of this nature would be covered. HoneyBaked argued that it purchased an all-risk policy that did not specifically exclude listeria. The court found some merit in this argument, but noted that the Ohio Supreme Court has yet to expressly adopt the doctrine. The court stated:
While a close reading of the policy excludes the loss of HoneyBaked's food products caused by listeria, a jury could find that HoneyBaked reasonably believed its all-risk policy covered its biggest risk – spoliation during processing of its product. The record indicates that HoneyBaked believed the policy covered this type of loss, and this belief, a jury could find, was not unreasonable.
Because a jury could find that HoneyBaked had a reasonable expectation of coverage, and because the policy unambiguously excludes losses caused by contamination, the availability of coverage, notwithstanding the exclusion, turns on the question of whether the Ohio law will recognize the reasonable-expectations doctrine.
On January 14, the parties submitted their proposed certified questions to the court for consideration. Naturally, each side colored their proposed question with advocacy for their respective positions, so it will be up to the district court to fashion what it deems to be an appropriate question for the Ohio Supreme Court's consideration.
No matter how the question is ultimately framed, the industry will keep a watchful eye for the result.
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