My maternal grandfather, Pasquale Cupito, was a legend. I have far too many stories to list here, but one of them involves a giant garbage can lid that he used as a cooking utensil. See, he could make a mean homemade pizza, but there was never enough to keep everyone satisfied. One day he concluded that a garbage can lid might make a dandy and enormous pizza pan, so he hammered one out, washed it, and drafted it into service on holidays. For years, people marveled about the delicious pizza and the very large and unusual-looking pan he employed to make it. But, as a member of the Inner Circle, I knew the truth. (I also remember my grandmother, a child of the Depression, complaining about the copious amount of cheese he used, but that’s another story.)
Grandpa’s garbage-can-lid-pizza never made anyone ill, but there was recently a close call for a gluten-free pizza crust manufacturer here in New Jersey known as Conte’s Pasta. Conte’s sold its crusts to a frozen pizza manufacturer, Nature’s One, which in turn sold pizza to Trader Joe’s, a major high-end supermarket.
Somehow, the pizza crust became contaminated with listeria, a nasty bacteria, which Trader Joe’s discovered before selling the product to the public. Trader Joe’s returned the entire inventory of Nature’s One pizza, requiring Nature’s One to issue a $150,000 refund, which is a lot of dough. (See what I did there?)
Understandably concerned, Trader Joe’s sent inspectors into Conte’s facility, who determined that Conte’s pizza crust manufacturing process was insufficiently safe.
Nature’s One then sued Conte’s, contending that it had lost $170K in product as the result of Conte’s defective manufacturing processes, as well as a lucrative contract with Trader Joe’s. Conte’s submitted the claim to its liability carrier, Republic, which tossed it aside. (See what I did there? Toss? Pizza?)
Unfortunately for Conte’s, the policy contained a so-called sistership exclusion, removing coverage for damages associated with product recall, 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, adjustment, removal or disposal of:
(1) “Your product”;
(2) “Your work”; or
(3) Any property of which “your product” or “your work” forms a part;
if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
Conte’s conceded that the sistership exclusion left the contamination claims with little spice (see what I did there?), and the Court accordingly found no coverage for that aspect of the claim.
The Court also found that there was no coverage for damages associated with Conte’s failed inspection, such as loss of goodwill and profits. That’s because this part of the underlying claim involved only “economic loss,” and, as New Jersey judges (state and federal) love to say, there’s no coverage for “economic loss.” Of course, all damages are “economic loss” because they involve money, and the claim here resulted from property damage, since the Nature’s One product was damaged by listeria. Damages resulting from property damage should be covered by insurance. But far be it for me to stand in the way of a judge-made exclusion.
Despite all this, Republic was unable to escape coverage for the loss. In addition to its other theories of liability, Nature’s Own had claimed that Conte’s committed conversion; essentially, Nature’s Own argued that Conte’s had wrongfully retained possession of some equipment provided by Nature’s Own in connection with performing the contract. Since the insurance policy covered claims for loss of use of tangible property, coverage existed, and Republic had to provide a defense.
Republic argued that conversion is an intentional tort, and intentional damage was excluded by the policy, but the Court found that conversion could potentially be committed negligently, and that was enough to trigger the duty to defend.
If Republic follows the usual insurance company script, Republic will now move for reconsideration, and, assuming that the motion is denied, will argue that it only has to pay for a fraction of the defense, since only one claim is potentially covered. Republic may also argue that it cannot in good conscience provide a fair defense, because of the conflict of interest between Conte’s and Republic. Namely, Republic wants a finding of intentional harm in the underlying case, leading to a finding of no coverage, while Conte’s wants, at worst, a finding of negligence, so that coverage exists. Under New Jersey law, though, as long as Conte’s agrees to a reservation of rights, the potential conflict shouldn’t matter.
This decision is a reminder of the way the duty to defend is supposed to work: If any of the allegations in the underlying complaint are even arguably covered, the insurance company is supposed to step up. In other words, if you’re a policyholder, don’t take no for an answer. And, under New Jersey law, if you have to file a coverage suit on a third-party liability claim like this one, and you’re successful, you’re entitled to recover your legal fees spent chasing the carrier.
So, while Conte’s likely won’t recover the whole pepperoni from its carrier, some is better than none.