Insurance Law

When Is the Presence of Lactobacillus Acidophilus an Occurrence Under a CGL Policy?

In Wisconsin Pharmacal Co. v. Nebraska Cultures of California, No. 13AP613, 2014 Wisc. App. LEXIS 899 (Wis. Ct. App. Oct. 29, 2014), [enhanced version available to subscribers], the Wisconsin Court of Appeals analyzed the circumstances under which a supplier’s negligent provision of an incorrect ingredient to a manufacturer, where the ingredient renders the other ingredients and the final product unusable, constitutes an “occurrence” under a commercial general liability (CGL) policy.

The dispute arose when a supplier mistakenly supplied the wrong ingredient to Wisconsin Pharmacal, which manufactured a “feminine health probiotic supplement” for a major retailer. The probiotic supplement was sold as a chewable tablet under the retailer’s label. Wisconsin Pharmacal made the chewable tablets through what the court called a “tableting process”—that is, by combining a number of raw ingredients and pressing the resulting mixture into tablets.

One of the necessary ingredients of the tablet was Lactobacillus rhamnosus A, a bacterium used as a probiotic. Wisconsin Pharmacal contracted with a series of suppliers to obtain a “substantial quantity” of the bacteria. However, instead of supplying Lactobacillus rhamnosus A, the suppliers mistakenly supplied Lactobacillus acidophilus. That bacterium, once incorporated into the finished product, could not be extracted from the tablets, which became unusable. The retailer was forced to recall the supplement.

The only issue before the court of appeals was an insurance-coverage dispute. The court of appeals ultimately determined that the suppliers’ CGL policies provided coverage, reversing the circuit court’s summary-judgment decision in favor of the insurers.

The preliminary issue was whether there was a grant of coverage at all. In other words, was there “property damage caused by an occurrence”? The court said yes. The damage to the other ingredients in the supplement and the damage to the finished probiotic tablets themselves was “physical injury to tangible property” sufficient to trigger coverage. Furthermore, the court recognized that there was damage to “cartons, inserts, tooling, dies, and other property.”

The court methodically addressed the insurers’ multiple arguments that coverage did not exist, ranging from the policies’ “business risk” exclusions to arguments based on the economic-loss doctrine’s integrated product/component part framework.

Judge Reilly dissented. He believed that the case involved essentially misrepresentation claims. That is, the suppliers represented that they would provide Lactobacillus rhamnosus A, but instead they supplied Lactobacillus acidophilus. The Wisconsin Supreme Court has held that a misrepresentation is neither an accident nor an occurrence under a CGL policy. In Judge Reilly’s view, the court had rewritten the CGL policy into a performance bond.

Barring review by the supreme court, the court’s detailed discussion of the CGL policies will have broad ramifications in future disputes between suppliers and manufacturers.

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