Frozen pizza, the exclusion of sisters, and the insurance company’s duty to defend

My maternal grandfather, Pasquale Cupito, was a legend. I have a lot of stories to include here, but one of them includes the lid of a giant trash can he used as a cooking tool. See, he could make a mean homemade pizza, but there wasn’t enough to please everyone. One day, he concluded that a trash can lid could make a huge, adorable pizza tray, so he took one out, washed it, and put it into service for the holidays. For years, people have marveled at the delicious pizza and the very large and unusual pizzas that he used to make. But, as a member of the inner circle, I knew the truth. (I also remember my grandmother, a depressed child, complaining about the copious amount of cheese he used, but that’s another story.)

Grandpa’s pizza with a litter lid has never made anyone sick, but recently there was a close call from a gluten-free pizza crust factory here in New Jersey known as County Pasta. Conti sold their crusts to frozen pizza maker Nature’s One, which in turn sold the pizzas to Trader Joe’s, a major upscale supermarket.

Somehow, the pizza crust became contaminated with listeria, a nasty bacteria that Trader Joe discovered before selling the product to the public. Trader Joe’s completely returned all of Nature’s One’s pizza stock, requiring Nature’s One to issue a $150,000 refund, which is a significant amount of dough. (See what I did there?)

It is understood that Trader Joe’s sent inspectors to Conti’s facility, who determined that Conti’s pizza crust manufacturing process wasn’t safe enough.

Nature’s One then sued Conte, claiming it lost $170,000 in product as a result of Conte’s defective manufacturing operations, as well as a lucrative contract with Trader Joe’s. Conti filed the claim with the liability company, Republic, which cast it aside. (See what you did there? Toss? Pizza?)

Unfortunately for Conte, the policy contained a so-called sisterhood exclusion, removing damage coverage associated with product recalls, as follows:

Damage claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, modification, removal or disposal of:

(1) “your product”;

(2) “your business”; or

(iii) any property of which Your Product or Your Business is a part;

If this product, business or property is withdrawn from the market or from use by any person or organization due to a known or suspected defect, deficiency, insufficiency or serious condition of it.

Conte conceded that the sisters’ exclusion left the contamination claims with little to no spice (see what I did there?), and accordingly, the court found no coverage for this aspect of the claim.

The court also found that there was no coverage for damages associated with failing Conte’s examination, such as loss of goodwill and profits. That’s because this part of the primary claim includes only “economic loss,” and as New Jersey (state and federal) judges like to say, there is no coverage of “economic loss.” Of course, all damages are an “economic loss” because they involve money, and the claim here resulted in property damage, because Nature’s One product was damaged by Listeria. The insurance must cover damages resulting from property damage. But it is far from me to stand in the way of exclusion from the making of the judge.

Despite all this, Republic could not get away with covering the loss. In addition to her other theories of responsibility, Nature’s Own claimed that Conte was committed to conversion; Essentially, Nature’s Own argued that Conti wrongly retained possession of certain equipment provided by Nature’s Own in connection with the performance of the contract. Since the insurance policy covered claims for loss of use of tangible property, coverage was in place, and the Republic had to file a defense.

Republic argued that diversion is intentional harm, and that the policy excluded intentional harm, but the court found that diversion could be committed through negligence, and that was sufficient to trigger the duty of defence.

If Republic follows the insurance company’s usual scenario, Republic will now apply for reconsideration and, assuming the claim is denied, will argue that it only has to pay a fraction of the defense, since it’s likely to cover only one claim. Republic may also argue that it cannot provide a fair and conscientious defense, due to the conflict of interest between Conte and the Republic. Specifically, Republic wants to find intentional damage in the base case, leading to a lack of coverage detection, while Conte wants, at worst, a negligent discovery, so that coverage is there. Under New Jersey law, though, as long as Conte agrees to reserve rights, potential conflicts shouldn’t matter.

This decision is a reminder of the way the defense duty is supposed to work: If any of the claims in the underlying complaint are covered, the insurer is supposed to come forward. In other words, if you are the owner of a policy, do not accept the answer with no. Under New Jersey law, if you have to file a coverage claim on a third party liability claim like this, and you are successful, you are entitled to a refund of the legal fees you spent chasing the carrier.

So while Conte likely won’t get the whole pepperoni back from its holder, some are better than nothing.

Conte’s lawyer Jonathan Wheeler From Wheeler, Deulio, and Barnaby. You can read the full resolution over here.

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