No Coverage After Beverage Product Failed Quality Control and Was Destroyed 

A Massachusetts appellate court, applying Massachusetts law, held that the loss of a bottled beverage product that was destroyed after quality control testing indicated that there was a risk for spoliation and was not covered under an “all risks” policy because the loss was excluded by a “faulty workmanship” exclusion.

P. Hood LLC (“Hood”) suffered various losses when a bottled beverage it was producing for Abbott Laboratories (“Abbott”) failed certain quality control measures. The product is a “shelf stable” beverage, meaning that the bottle only requires refrigeration after it is opened. To ensure that the product does not spoil while on the shelf, the product must be manufactured and bottled under strict aseptic conditions, and the bottles must stay hermetically sealed until they are opened.  As required by a contract between Hood and Abbott, Hood conducted quality control testing to ensure that the bottles would stay sealed after they left the plant.  Upon testing of the May 2009 production run, it was discovered that the seal had a failure rate of approximately seven to nine percent.  Abbott informed Hood that it would not accept any bottles from the May 2009 production run and after additional testing it was agreed that none of the almost two million bottles from the May 2009 production run could be marketed.  Therefore, those bottles were destroyed.   It was later determined that the problem had to do with the bottle caps that Hood was using.

At issue before the appellate court was whether the losses were covered by the “all risks” property insurance policy that Hood purchased from Allianz Global Risks US Insurance Company (“Allianz”).   The policy in question provided coverage for “all risks of direct physical loss or damage to Insured Property.”  Allianz argued that there was no actual property damage that triggered coverage.  It pointed out that there was no evidence that even one bottle that was destroyed sustained physical damage prior to Hood destroying them.   According to Allianz, the testing showed, at most, a higher probability that bottles from the May 2009 production run could have become damaged.  Allianz argued that a mere increased risk of future property damage is not itself covered by the policy.   In response, Hood argued that the property damage occurred once doubts were raised as to the product’s fitness for human consumption and that the product had thereby lost all value.   The court found that it did not have to determine whether the requisite property damage occurred, because it held that even if the property damage did occur, any losses at issue fell within a “faulty workmanship” policy exclusion.  The court held: “When a company ‘assumes the obligation of completing [its work] in accordance with plans and specifications and fails to perform properly, [it] cannot recover under the all-risk policy for the cost of making good [its] faulty work.’”

Hood argued that, even if the defective workmanship exclusion applied, it only applied to preclude coverage for the bottle caps themselves and that other losses, such as the product in the bottles, were covered.  Hood based this argument on the following language that preceded the exclusion:

This policy does not cover the following, but if physical loss or damage not otherwise excluded by this ‘policy’ to Insured Property at Insured Location(s) results, then only such resulting physical loss or damage is covered by this ‘policy.’

The court disagreed and found that the issue before the court was not one where an excluded occurrence involving initial property damage led to other property damage of a different kind.  A problem with the bottle caps directly rendered the entire product damaged and therefore the loss fell squarely within the exclusion language.  H. P. Hood LLC v. Allianz Global Risks US Ins. Co., No. 14-P-1605 (Mass. App. Ct.  Nov. 2, 2015).