Summary
applying General Mills in third-party liability context to hold "an adulterated food product can be deemed physically damaged because it is legally unsaleable"
Summary of this case from Netherlands Ins. Co. v. Main St. Ingredients, LLCOpinion
No. A06-1933.
Filed June 26, 2007.
Appeal from Hennepin County District Court, File No. 27CV05006042.
Steven P. Zabel, Jeffrey A. Eyres, Leonard, Street and Deinard, P.A., (for appellant).
Eric J. Strobel, Holly J. Tchida, Hinshaw Culbertson, L.L.P., (for respondent).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2006).
UNPUBLISHED OPINION
Appellant, a sugar producer, challenges the district court's denial of its motion for summary judgment and a subsequent jury verdict in its breach-of-contract action against respondent insurer for property-damage coverage for claimed property damage to a customer's food product. Appellant argues that the district court failed to apply the appropriate definition of "physical damage" applicable in the food industry. Appellant also asserts that the district court erred in holding that respondent did not breach its duty to defend and in denying appellant's request for attorney fees. We affirm the district court's denial of appellant's motion for summary judgment, reverse the jury verdict on the ground that the jury verdict form erroneously stated the law, reverse the district court's holding that respondent did not breach its duty to defend, and remand for a new trial and for a determination of what damages, if any, appellant incurred as a result of the breach of the duty to defend.
FACTS
Appellant United Sugars Corporation (USC) is the largest marketer of industrial consumer sugar in the United States. At all times relevant, USC was insured under a Commercial General Liability insurance policy issued by respondent St. Paul Fire and Marine Insurance Company (St. Paul).
The policy provides that St. Paul has "the right and duty to defend [USC] against a claim or suit for injury or damage covered by this agreement." "Claim" is defined in the policy as "a demand that seeks damages." The policy provides coverage for those amounts that USC "is legally required to pay as damages for covered bodily injury or property damage that . . . is caused by an event." "Property damage" is defined in the policy, in relevant part, as "physical damage to tangible property of others, including all resulting loss of use of that property." The policy does not define "physical damage."
In July 2004, one of USC's customers (Nestlé) informed USC that it had shut down the production of cookie dough at one of its facilities because it had discovered contaminants in the form of bee parts and cigarette butts in USC's sugar. The bee parts and cigarette butts were observed on three inspections of screens through which the sugar passed before it was added to the dough. On the third inspection, Nestlé determined that all of the cookie dough that had been produced using this sugar was "adulterated" and could not legally be sold under federal Food and Drug Administration (FDA) regulations. Nestlé sent USC an invoice claiming more than $700,000 in damages for loss of dough and raw ingredients, cleaning production equipment, and storage of the frozen cookie dough prior to destruction.
Federal law provides that food is adulterated "if it has been prepared, packed, or held under insanitary conditions whereby it may have become contaminated with filth, or whereby it may have been rendered injurious to health." 21 U.S.C. § 342(a)(4) (2000); United States v. King's Trading, Inc., 724 F.2d 631, 632 (8th Cir. 1983).
USC determined that the contamination of its sugar had occurred at a shipping facility owned by Nutritive Sweeteners, Inc. Nutritive Sweeteners was under contract with USC to transport USC's sugar to Nestlé. USC concurred with Nestlé that under FDA regulations, the cookie dough could not legally be sold due to contact with contaminated sugar. Neither Nestlé nor USC performed any testing on the cookie dough to determine whether any bee parts or cigarette butts from the sugar actually got into the dough.
USC submitted Nestlé's invoice to St. Paul seeking coverage under the policy for property damage to the dough. St. Paul denied coverage on several grounds, including its assertion that property damage, as defined in the policy, had not occurred. USC paid Nestlé the full amount of its claim and then sued St. Paul for breach of contract, claiming that the cookie dough had sustained property damage covered by the policy because it was made unsaleable due to contact with the contaminated sugar and that St. Paul had breached its duty to defend. St. Paul counterclaimed for a declaration that the claim is not covered by the policy. Both parties moved for summary judgment. The district court denied St. Paul's motion and granted partial summary judgment to USC, holding that if Nestlé's property was contaminated by USC's sugar, the policy provides coverage for the claimed loss. The district court concluded that whether the dough was contaminated by the sugar was a genuine issue of material fact.
At trial, a single question was submitted to the jury in a special verdict form: "On or about July 9, 12, or 13 was Nestlé's cookie dough contaminated with a foreign matter by [USC's] product?" The jury answered, "no." Based on the verdict, the district court entered judgment for St. Paul. The district court denied USC's post-trial motion for attorney fees, holding that St. Paul had not breached its duty to defend, and denied USC's motion for a new trial. This appeal followed.
DECISION
I. Summary Judgment
USC argues that the district court failed to apply the correct standard for determining whether the dough was physically damaged and erred in denying its motion for summary judgment on this issue. USC argues that because it submitted undisputed evidence that the dough was unsaleable under federal law, it established as a matter of law that the dough was physically damaged, triggering coverage under the policy as a matter of law.
On appeal from denial of summary judgment, this court considers two questions, whether there are any genuine issues of material fact and whether the district court erred in its application of the law. Cummings v. Koehnen, 568 N.W.2d 418, 420 (Minn. 1997). The reviewing court must view the evidence in the light most favorable to the party against whom summary judgment was granted. Vetter v. Sec. Cont'l Ins. Co., 567 N.W.2d 516, 520 (Minn. 1997).
Construction of language in an insurance contract is a question of law reviewed de novo. Jenoff, Inc. v. New Hampshire Ins. Co., 558 N.W.2d 260, 262 (Minn. 1997). When language in an insurance policy is clear and unambiguous, it must be given its usual and accepted meaning. Wanzek Constr., Inc. v. Employers Ins. of Wausau, 679 N.W.2d 322, 324 (Minn. 2004). "[W]hen interpreting an insurance policy, we will avoid an interpretation that will forfeit the rights of the insured under the policy, unless such an intent is manifest in clear and unambiguous language." Nathe Bros., Inc. v. Am. Nat. Fire Ins. Co., 615 N.W.2d 341, 344 (Minn. 2000) (quotation omitted).
USC argues that in the absence of a definition of physical damage in the policy, the issue of what constitutes physical damage in this case is governed by General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147 (Minn.App. 2001), review denied (Minn. Apr. 17, 2001). In General Mills, we determined that a first-party all-risk policy provided coverage for adulterated food products under a provision that covered all risks of "direct physical loss or damage to property insured." Id. at 151. General Mills involved the voluntary destruction of cereal products manufactured from oat stocks in which the FDA had found traces of a chemical that was not harmful to consumers but was not approved by the FDA for use on oats. Id.at 150. The insurer argued that there was no direct physical loss or damage to the cereal because it could have been safely consumed but for a legal regulation. Id.at 152. We disagreed, citing prior decisions holding that "direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that the insured property is injured in some way." Id. (emphasis added) (citing Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn.App. 1997), in which we held that the presence of asbestos seriously impaired the function of an apartment building although the building itself did not suffer a "tangible injury").
In General Mills, we noted that "[t]he business of manufacturing food products requires conforming to the appropriate FDA regulations" and held that the district court did not err in finding that the fact that the cereal could not be legally sold was "an impairment of function and value sufficient to support a finding of physical damage." Id. (emphasis added).
USC argues that because the cookie dough in this case was not saleable under FDA regulations, just as in General Mills, there has been an impairment of function and value sufficient to support a finding of physical damage to the dough, triggering coverage under the policy. See also Marshall Produce Co. v. St. Paul Fire Marine Ins. Co., 256 Minn. 404, 423, 98 N.W.2d 280, 293-94 (1959) (holding that it was not necessary that a merchant's food items, which were rejected by the government due to exposure to smoke from a nearby fire, be "intrinsically damaged so long as [their] value was impaired in order to support a claim for either loss or property damage").
St. Paul argues that General Mills is distinguishable because it involved a claim under an all-risk first-party property policy, not a third-party liability policy such as the policy involved in this case. All-risk first-party property policies are broadly construed to cover "all fortuitous losses not resulting from misconduct or fraud." But the holding in General Mills, that an adulterated food product can be deemed physically damaged because it is legally unsaleable, is not limited to first-party all-risk policies. Absent specific policy language that would mandate a different meaning, we conclude that the definition of what constitutes physical damage to a food product does not depend on whether the term "physical damage" is used in a first-or third-party insurance policy.
General Mills, 622 N.W.2d at 152 (quotation omitted).
St. Paul also argues that General Mills is distinguishable because the FDA found that General Mills's oat stocks were contaminated with an unapproved chemical, whereas in this case there is no direct involvement of the FDA. But USC presented evidence that food producers are expected to self-regulate, and USC's expert witnesses all testified that the bee parts and cigarette butts are considered contaminants by the FDA and that, because the dough came into contact with the contaminated sugar, it was manufactured under insanitary conditions, making the dough unsaleable under FDA regulations, whether or not the dough actually contained bee parts or cigarette butts.
St. Paul asserts that absent proof that the cookie dough actually contained bee parts or cigarette butts, USC cannot establish that there was "physical damage" to the cookie dough as that term is used in the policy. St. Paul argues that this case is more similar to the facts in Source Food Tech., Inc. v. United States Fidelity Guaranty Co., 465 F.3d 834, 836-838 (8th Cir. 2006) (applying Minnesota law). In Source Food, a manufacturer could not transport its beef product from its supplier in Canada to the United States after a United States Department of Agriculture (USDA) embargo prohibited the importation of all beef from Canada. Id. at 835. Citing General Mills, the manufacturer argued that the loss of function of the beef product due to the USDA embargo constituted direct physical loss to its property. Id. at 836. The court in Source Food concluded that General Mills was distinguishable because in Source Food, it was undisputed that the beef was not contaminated or adulterated. Id. at 837. Likewise, because Source Food does not involve a food product that was contaminated or adulterated, it is distinguishable from the case at hand.
At the time of the hearing on USC's summary-judgment motion, St. Paul presented affidavits describing prior instances when bee parts and other contaminants were found in USC's sugar that did not result in a determination that dough made from the sugar was adulterated and unsaleable. The district court stated that a material fact question existed because it could not determine, based on the evidence presented by both parties in support of motions for summary judgment, "whether or not the cigarette butts were removed at a point before contamination or if the mere fact of their existence concludes contamination." On the record before the district court at the time of the summary-judgment motion, we cannot conclude that the district court erred by denying summary judgment to USC on the issue of physical damage.
II. New Trial
An appellate court "will not set aside a jury verdict on an appeal from a district court's denial of a motion for a new trial unless it is manifestly and palpably contrary to the evidence viewed as a whole and in the light most favorable to the verdict." Navarre v. S. Washington County Schs., 652 N.W.2d 9, 21 (Minn. 2002) (quotations omitted). "The trial court has broad discretion both in writing jury instructions and in framing special verdict questions." Dang v. Dang v. St. Paul Ramsey Medical Center, Inc., 490 N.W.2d 653, 658 (Minn.App. 1992). "Absent an abuse of discretion, this court will not reverse a trial court's decision as to a special verdict's form." Dronebusch v. MVBA Harvestore System, 488 N.W. 2d 490, 496 (Minn.App. 1992).
At trial, USC's theory of recovery was that because the cookie dough came into contact with contaminated sugar, the dough was "adulterated" and therefore unsaleable under FDA standards, constituting physical damage to the dough covered by the policy. USC proposed jury instructions based on quotations from General Mills explaining that "impairment of function and value [is] sufficient to support a finding of physical damage." General Mills, 622 N.W.2d at 152. The district court rejected USC's proposed jury instructions and rejected USC's proposed special verdict question: "Do you find by the preponderance of the evidence that the Nestlé frozen cookie dough was `adulterated' by [USC's] product?" Instead, the special verdict form submitted to the jury asked: "[On relevant date] was Nestle's cookie dough contaminated with a foreign matter by [USC's] product?"
USC presented evidence that, under FDA regulations, the dough was adulterated and not saleable once it had come into contact with contaminated sugar, whether or not the dough actually contained any bee parts or cigarette butts. The evidence also established that FDA regulations are subjective and depend on good-faith self-regulation by food producers and that Nestlé made a valid judgment call about when to declare the dough unsaleable.
St. Paul's primary theory at trial was that whether the dough was adulterated or could not be sold under FDA regulations is irrelevant to the issue of coverage under the policy, which depends solely on whether the dough actually contained bee parts and cigarette butts. St. Paul argued that there was no credible evidence that the dough could not have been legally sold, only evidence that Nestlé made a business decision not to sell it, and USC concurred in this decision because Nestlé is one of its major customers.
In its motion for a new trial and on appeal, USC argues that the question submitted to the jury erroneously required USC to prove that the cookie dough actually contained bee parts or cigarette butts, when, under General Mills, USC only had to prove that contact with the contaminated sugar made the dough adulterated and unsaleable, thereby constituting physical damage to the dough and triggering coverage under the policy. USC argued that the special verdict form should have asked the jurors to determine whether the dough was adulterated rather than asking whether the dough was contaminated with a foreign matter.
In its order denying USC's motion for a new trial, the district court stated:
[USC] believes that the word "adulterated" should have been used in place of "contaminated." Because of this, [USC] wants a new trial using this standard.
[Earlier], the Court denied [USC's] Motion for Summary Judgment stating the issue to be determined by a jury as to whether or not the dough in question was actually contaminated. [Then] the Court denied [USC's] Motion for Reconsideration of the Summary Judgment Order and reiterated that "the present case requires a fact finding of contamination." Language is important. [USC's] choice of language has been was the cookie dough adulterated. [St. Paul] preferred the language used by this Court. The words adulterated and contaminated are synonymous. The issue was for the jury to determine whether there was stuff in the sugar that got into the cookie dough and consequently property damage. . . . Therefore, [USC's] Motion for a New Trial is denied.
Nowhere in the record does the district court explain why it rejected the General Mills definition of what can constitute property damage in the context of food production, i.e., that mere exposure of a food product to contaminants supports a finding of physical damage as that term is used in an insurance policy. We conclude that the General Mills definition of what can constitute physical damage to a food product applies in this case, and the district court abused its discretion by submitting a special verdict form that did not allow the jury to determine whether USC met its burden to prove property damage by establishing that the dough was adulterated and unsaleable under FDA regulations. The district court abused its discretion by submitting a special verdict form that did not allow the jury to find that the cookie dough was physically damaged by any means other than proof that it actually contained "foreign matter." Because the verdict form did not accurately reflect the law as stated in General Mills, we conclude that USC is entitled to a new trial.
III. Attorney Fees
USC also argues that the district court erred in holding that St. Paul did not breach its duty to defend and denying USC's motion for attorney fees incurred in pursuing its breach of contract claim against St. Paul. Whether an insurer has a duty to defend or indemnify is a legal question reviewed de novo. Thommes v. Milwaukee Ins. Co., 641 N.W.2d 877, 879 (Minn. 2002). "The duty to defend is distinct from and broader than the duty to indemnify." SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305, 316 (Minn. 1995). "When an action leads to a determination that an insurer breached its duty to defend, the insured may recover from the insurer the legal fees incurred in bringing that action." Redeemer Covenant Church of Brooklyn Park v. Church Mut. Ins. Co., 567 N.W.2d 71, 82 (Minn.App. 1997), review denied (Minn. Oct. 1, 1997). "Generally where questions of fact need to be discovered to determine if an insurer has a duty to indemnify, a duty to defend exists." Westfield Ins. Co. v. Kroiss, 694 N.W.2d 102, 106 (Minn.App. 2005), review denied (Minn. Jun. 28, 2005). "[T]he insured is not entitled to recover attorney fees incurred in maintaining or defending a declaratory action to determine the question of coverage unless the insurer has breached the insurance contract in some respect — usually by wrongfully refusing to defend the insured." Id. at 107-108 (quotation omitted) (concluding that attorney fees of a declaratory judgment action are damages arising directly from the breach of the duty to defend). "[C]aselaw clearly states that where an insurer refuses to defend an insured after the insured has tendered the suit and a duty to defend is subsequently determined in a declaratory judgment action, the insured can recover the attorney fees for the declaratory judgment action." Id. at 108.
The district court, without explanation, held that St. Paul did not breach its duty to defend. But we conclude that the unchallenged summary judgment granted to USC that there was coverage if the dough was contaminated by USC's sugar, together with the district court's determination that there was a genuine question of material fact concerning whether the dough was contaminated, compels the conclusion that St. Paul had a duty to defend. SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W. 2d at 316 (stating that `[i]f any claim is arguably covered under a policy, the insurer must defend and reserve any arguments regarding coverage"). We therefore reverse the holding that St. Paul did not breach its duty to defend and remand for the district court's determination of whether USC is entitled to an award of attorney fees.