Imagine your favorite loaf of bread. Maybe it is a fresh multigrain loaf from your local bakery. Maybe it is a packaged cinnamon raisin bread from the bread aisle of your local supermarket. Maybe it is a rye bread or a whole wheat bread or a simple white bread. After you bring the bread home and enjoy it for a few days, you may begin to notice some bluish green spots on it: the dreaded mold. You do not go back to the bakery or the supermarket to return the bread because the bread is not “bad” or “contaminated;” it has simply reached the end of its expected shelf life.
The same scenario may be true for that yogurt in your refrigerator, or the hummus you ordered for dinner last night, or the tomatoes or cucumbers you purchased from your local grocer, or the individually packaged cupcake snacks you snuck into your shopping cart. The products look acceptable when you bring them home, but then spoil days or weeks later. But the mold is not surprising because certain products have a limited shelf life.
Sometimes the mold becomes visible on the product prior to the “best by” date on the product’s packaging, and sometimes the mold becomes visible even before the product leaves the retailer. There are a number of reasons for the early deterioration of a product, including, for example, temperature abuse by the manufacturer or retailer, failure to store the product under proper conditions, chemical treatments to the product that are intended to lengthen shelf life but may actually decrease shelf life, or excessive moisture getting into the product during production. When a product spoils earlier than expected, the food manufacturer will likely issue a recall of the product, notify its customers, issue a press release, and pull product from store shelves. The manufacturer will also likely initiate a root cause investigation to see the cause of the product’s early spoilage.
If the food manufacturer purchased insurance coverage under a contaminated products insurance (“CPI”) policy, it may submit a claim in connection with the mold and the recall. But is the product really “contaminated” so as to entitle the insured to coverage under the CPI policy? Or is the mold merely a quality issue?
As we also discuss in another article: Product Contamination: When The Spices Kick It Up a Notch, Who Will Respond? a typical CPI policy indemnifies the insured for losses resulting from an “accidental product contamination,” which generally means: the accidental or unintentional contamination, impairment, or mislabeling (including mislabeling of instructions for use), during the manufacture, preparation, packaging, or labeling of the insured’s products — provided always that the consumption or use of the insured’s contaminated products has, within a certain period of time (e.g., 120 days or 365 days), resulted in or may result in bodily injury or physical damage to tangible property other than products of the insured. The typical CPI policy covers reasonable and necessary first-party expenses incurred by the insured ”solely and directly” as a result of a covered insured contamination event, including but not limited to: (i) recall costs (i.e., costs incurred in the recall, inspection, examination, disposal, and/or destruction of the contaminated products); (ii) business interruption costs; (iii) rehabilitation costs; and (iv) consultant and advisor costs. See, e.g., Caudill Seed & Warehouse Co., Inc. v. Houston Casualty Co., 835 F.Supp.2d 329 (W.D. Ky. 2011); Fresh Express Inc. v. Beazley Syndicate, 2623/623 at Lloyd’s et al., 199 Cal. App. 4th 1038 (2011).
A “contamination” of the insured’s product under a CPI policy generally requires the introduction of a foreign substance. See Wornick Co. v. Houston Casualty Co., 2013 WL 1832671, at *6 (S.D. Ohio May 1, 2013) (analyzing the meaning of the term “contamination” under a CPI policy that did not specifically define the term “contamination,” and holding that a product contamination requires that the “product be soiled, stained, corrupted, infected, or otherwise rendered impure by contact or mixture”). Thus, an insured must present evidence in its claim submission that the insured product came in contact with a foreign substance. If mold was actually a “contaminant,” the insured would have to establish that there is no acceptable level of mold in the product; that mold spores are not typically present in the product; and that the “mold” or another contaminant was introduced into the product during or post-production.
Mold is typically not considered to be a contaminant nor is mold “introduced” into a product because mold spores are ubiquitous in nature and generally are always present in food products. Temperature conditions, humidity, or other external factors may accelerate the mold spores developing into visible mold. Mold is a natural microorganism that uses water for energy and growth, and water is an essential component of practically all foods. An accelerated degradation process, without the introduction of a foreign substance, is not an insurable event under a CPI policy. The mold that eventually appears on the product is merely visible evidence of the natural deterioration process of the product.
Notably, even if the FDA treats a product containing mold as “adulterated,” that is insufficient to establish coverage under a CPI policy because the term “adulterated” is not synonymous with “contaminated” under a CPI policy. “Adulterated” is an FDA regulatory term, defined at 21 U.S.C. Section 342. “Adulterated” does not mean “contaminated” within the meaning of a CPI policy, which generally requires the introduction of a foreign substance and does not cover internal product issues.
An “impairment” under a CPI policy generally requires a showing by the insured that the product was damaged, weakened, or diminished due to a defect or flaw in the product itself. See Wornick, 2013 WL 1832671, at *6-8 (holding that the term “impairment” under a CPI policy should be interpreted to mean “damaged, weakened, or diminished due to a defect or flaw in the product itself” and citing Black’s Law Dictionary (9th ed. 2009), defining the verb “impair” as “[t]o diminish the value of (property or a property; right)”); Ruiz Food Products, Inc. v. Catlin Underwriting U.S., Inc., 2012 WL 4050001, at *8 (E.D. Ca. Sept. 13, 2012), aff’d 588 Fed. Appx. 704 (9th Cir. 2014) (analyzing the meaning of the term “impairment” under a CPI policy that did not define the term “impairment” and noting that “Black’s Law Dictionary defines the noun ‘impairment’ as: ‘[t]he fact or state of being damaged, weakened, or diminished.’ Black’s Law Dictionary 819 (9th ed. 2009). Similarly, Black’s Law Dictionary defines the verb to ‘impair’ as: [t]o diminish the value of (property or a property right).”)
Thus, for the product to be considered impaired, an insured must submit evidence that it was damaged, weakened, or diminished due to a defect or flaw in the product itself. Products will often include ingredients that are prone to spoilage and have the potential to develop visible mold. The presence of visible mold does not mean there is an “impairment” of the product. If the product leaves the production facility in accordance with specifications, moisture levels, and/or acceptable levels of microorganisms, like bacteria, yeast, or mold, and is put into the marketplace in an acceptable marketable condition, and later develops mold earlier than anticipated, that does not mean that the product is defective or flawed. Rather, it is likely because the product naturally deteriorated or transformed over time. External factors, like temperature conditions or humidity, may accelerate this natural deterioration process.
A “mislabeling” under a CPI policy generally requires the omission of an ingredient from the label of the insured’s product or an inaccurate or incomplete listing of ingredients from the label of the insured’s product, which could lead to bodily injury typically through an allergic reaction. The insured must establish that an ingredient was omitted from a product’s label, such as a failure to include Penicillium roqueforti on an ingredient list for blue cheese. But, if mold was not intended as an ingredient in a product, a failure to include mold on the product’s label would not be considered a “mislabeling” under a CPI policy.
In sum, if a product simply degrades faster than an insured expected, this accelerated degradation process, without the introduction of a foreign substance or evidence of an impairment, is not an insurable event under a typical CPI policy. The mold that eventually appears on a product is usually visible evidence of the natural deterioration process of the product. Mold spores that eventually lead to visible mold on a product are not a “contaminant”, nor is the presence of mold spores an “impairment”.
Indeed, because CPI policies do not cover the inevitable natural aging process of products, they often contain an Exclusion for losses caused by, arising out of, or attributable to, directly or indirectly, the deterioration, decomposition, or transformation of such products, unless caused by an insured event.
Because mold spores are everywhere, visible mold is inevitable in a lot of products that have a shelf life. It is simply part of the products’ aging process. That the products may age faster than expected is an unfortunate quality issue for food manufacturers, but is generally not an insurable event under a CPI policy. Otherwise, insurers could conceivably be held responsible for every loaf of bread that exhibits visible mold prior to the end of its expected “best by” date. This is typically not a risk that is contemplated under a CPI policy.
Jeffrey S. Weinstein is a partner at Mound Cotton. You can reach him at 212-804-4226 or firstname.lastname@example.org. Sara F. Lilling is an associate at Mound Cotton. You can reach her at 516-417-5784 or email@example.com.