New York Federal Court Rejects Product Liability Insurance Claim Made Against a General Liability Policy
 
June 24, 2008
 
Summer Lee Sylva- New York

The United States District Court for the Southern District of New York, applying the law of the state of New Hampshire, recently denied plaintiff Tradin Organics USA, Inc. (Tradin), an organic food distributor, recovery on a product liability claim filed with its insurer, defendant Maryland Casualty Company (Maryland), under a policy which provided commercial general liability coverage. Tradin Organics USA Inc. v. Maryland Cas. Co., 2008 WL 241081 (S.D.N.Y. 2008). The court held that a “your product” policy exclusion “unambiguously preclude[d] coverage for losses caused by contaminated or defective product[s] sold by the insured” – a view, according to the Tradin court, endorsed by numerous courts in various jurisdictions, including New York.

Policy Exclusions Are Key

Tradin filed suit after Maryland rejected its claim to recover settlement costs it incurred as a result of the Canadian government’s recall of Tradin’s contaminated food product, raspberry crumble. Crofters Food Ltd., a Canadian-based company, had contracted with Tradin for the purchase of a large quantity of raspberry crumble. Tradin’s subcontractor, a Serbian company, produced and shipped the contaminated product directly to Crofters. After agreeing to compensate Crofters for the contaminated product, Tradin filed a claim for reimbursement under the commercial general liability policy issued to it by Maryland. Issued to Tradin, a New Hampshire corporation, through a New Hampshire-based insurance broker, the policy contained no choice of law provision and numerous coverage exclusions.

The policy covered Tradin for “those sums that Tradin [became] legally obligated to pay as damages because of … ‘property damage’ to which this insurance applie[d],” but excluded coverage for damages due to “your product” and damages caused by “your work.” The policy defined “your product” as “any goods or products … manufactured, sold, handled, distributed or disposed of by” Tradin. The “your work” provision excluded from coverage any work or operations performed by Tradin or on Tradin’s behalf as well as “materials, parts or equipment furnished in connection with such work or operations.” This latter exclusion did not apply, however, “if the damaged work or the work out of which the damage [arose]” was performed on Tradin’s behalf by a subcontractor.

Maryland denied coverage based on the “your product” exclusion. Tradin, arguing that it was entitled to coverage because the “your work” exclusion did not apply, filed suit to recover settlement costs under a breach of contract claim. Tradin also sought treble damages on the theory that Maryland’s coverage denial was made in bad faith. Both parties moved for summary judgment, which the court stated could be granted if the wording of the policy “convey[ed] a definite and precise meaning absent any ambiguity.” Seiden Assocs., Inc., v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).

Because federal jurisdiction was based on diversity, the court applied the choice of law rules of New York, the forum state. White v. ABCO Eng’g. Corp., 221 F.3d 293,201 (2d Cir. 2000). Various factors deemed relevant by New York courts in resolving insurance contract disputes were important considerations in the court’s analysis and included: (1) the place the contract was negotiated, signed and issued; (2) the place of performance; (3) the location of the contract’s subject matter; (4) the parties’ domicile, residence, nationality, place of incorporation and place of business; (5) the location of the insured risk; (6) the location of the insurance broker; and (7) the location where premiums would be paid. Based upon these factors, the court concluded that New Hampshire’s substantive law governed the policy, acknowledging New Hampshire’s significant role as the state in which Tradin was incorporated and maintained its only place of business, the location of the agent to whom Tradin’s insurance policy was issued and delivered, and the only state from which Tradin could have paid its premiums. Contributing to this conclusion, even if only by default, was the policy’s omission of a choice-of-law provision.

Subcontractor Exclusions to “Your Product” and “Your Work”

Notwithstanding its willingness to apply New Hampshire law, the court acknowledged that New Hampshire had yet to specifically interpret “your work” and “your product” coverage exclusions. Branded an “unsettled area” of New Hampshire law, the court presumed, as is permitted, that New Hampshire’s law likely resembled the law of New York. Rogers v. Grimaldi, 875 F.2d 994, 1003 (2d Cir. 1989). Augmenting this presumption with an examination of New Hampshire’s contract law in construing insurance policies generally, as well as relevant decisions of other state courts, the New York court concluded that various jurisdictions, including New York, “have held that similarly defined ‘your product’ exclusions unambiguously preclude coverage for losses caused by a contaminated or defective product sold by the insured.”

Here, the court stated, there was no dispute that Tradin’s tainted product was contaminated and defective, nor was there any question that Tradin had sold that product to Crofters – conduct satisfying the express language of the “your product” coverage exclusion. The district court rejected Tradin’s argument that it was entitled to coverage because the order and delivery of the defective product by Tradin’s subcontractor satisfied the subcontractor exception to the “your work” exclusion, concluding that the policy “unambiguously allow[ed] [Maryland] to deny coverage if any one” of the policy’s coverage exclusions applied. With the court’s grant of Maryland’s summary judgment motion, Tradin’s breach of contract action was dismissed and the bad faith tort on which it hinged was eliminated. Lawton v. Great Southwest Fire Ins. Co., 118 N.H. 607, 613 (N.H. 1978).

With this decision the New York federal court concluded that under New Hampshire law, a similarly worded “your product” exclusion is a general commercial liability policy precludes coverage for losses caused by contaminated or defective products sold by the insured. Companies that manufacture and/or sell “products” are advised to have separate product liability coverage.

For more information, email Summer Sylva at summer.sylva@hklaw.com or call toll free, 1.888.688.8500.