Wade Clark Mulcahy LLP

<p style="text-align: justify;">In <em><a href="https://www.wcmlaw.com/wp-content/uploads/2020/06/Contes-Pasta-v.-Republic-Franklin-Insurance-Company.pdf">Conte's Pasta v. Republic Franklin Insurance Company</a>,</em> Judge Reneé Bumb of the District Court of New Jersey expertly weaved through differing allegations levied against an insured in determining whether its insurer owes a duty to defend.  The court’s holding resulted in Republic Franklin Insurance Company (“RFI”) owing a duty to defend Conte’s Pasta in the underlying action.  However, the decision is notable for its proficient analysis of three different coverage issues: the application of a policy exclusion, the notion that economic damages are not “property damage” caused by an “occurrence,” and that while one cause of action <em>may</em> be intentional, it is nonetheless covered absent specific allegations that the insured acted intentionally.</p>
<p style="text-align: justify;">Conte’s Pasta was sued in federal court in Ohio by its customer, Nature’s One.  In the underlying action, Nature’s One alleged that it contracted to use Conte’s Pasta’s manufacturing facility to make its pizza crusts which it sold to Trader Joe’s.  Within a few months, however, the Conte’s Pasta facility became contaminated with Listeria Monocytogenes, the cause of listeriosis.  Nature’s One alleged that Conte’s Pasta failed to quarantine the contaminated crust, which resulted in Trader Joe’s returning the crusts and Nature’s One issuing a $150,000 refund.  In addition, Trader Joe’s required an audit of the Conte’s Pasta facility, which it failed, ultimately causing Trader Joe’s to cease ordering through Nature’s One.  Finally, Nature’s One alleged that Conte’s Pasta failed to return its packaging equipment after the audit.</p>
<p style="text-align: justify;">Conte’s Pasta tendered the defense of that suit to RFI, which denied coverage.  In the ensuing coverage litigation in New Jersey, the court looked at the three distinct theories of liability pled by Nature’s One: (1) the claims related to the contamination, which resulted in Nature’s One having to pay $150,000, (2) the failed inspection claims, which resulted in Trader Joe’s ceasing its orders with Nature’s One and causing lost profits, and (3) the claim for conversion arising from Conte’s Pasta’s failure to return the equipment.</p>
<p style="text-align: justify;">With respect to the contamination claims, the court held that they are precluded by an exclusion in the RFI policy which barred coverage for damage “for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of” the insured’s product.  Given the exclusion’s plain language, and Conte Pasta’s apparent conceit that the exclusion applied, the court held there was no coverage for these claims. Regarding the failed inspection claims, the court held that they did not constitute “property damage” caused by an “occurrence.”  The court thus held: “The failed inspection claims are not premised on any alleged damage to tangible property.  They are based on the alleged injury to Nature’s One’s business relationship with Trader Joe’s which allegedly resulted in loss of goodwill and lost profits.  Such an economic loss is not intended to be covered by general commercial liability policies.”   However, the court held that RFI had a duty to defend Conte’s Pasta with respect to the conversion claim.  While conversion <em>can</em> be an intentional tort (and thus excluded under the policy) under both New Jersey and Ohio law, that is not necessarily the case.  Rather, a defendant can be liable for conversion even if it was acting under a misapprehension.  Because the underlying allegations did not specify that Conte’s Pasta acted intentionally in failing to return the equipment, the court held that RFI was obligated to defend Conte’s Pasta, and potentially indemnify it for the conversion claim.</p>
<p style="text-align: justify;">Thanks to Douglas Giombaresse for his contribution to this post.  Please email <a href="mailto:gcoats@wcmlaw.com">Georgia Coats</a> with any questions.</p>