Thursday, July 27, 2006

When is cheese worth suing over? When $13.5 million worth of it goes bad

That's right, Colorado-based Leprino Foods Company lost more than 8 million pounds of mozzarella cheese because of the conditions at a third-party warehouse.

Leprino, the largest domestic manufacturer of mozzarella cheese, tried to recoup the losses under its all-risk insurance policy underwritten by Factory Mutual Insurance Company. Factory Mutual rejected the claim, saying it was excluded under the "contamination exclusion" of its policy.

In a 19-page decision, the 10th U.S. Circuit Court of Appeals reversed the lower court judge on several holdings and ordered a new trial for Leprino.

According to the opinion, Leprino stores its outgoing cheese in a cold-storage warehouses, sometimes as much as 40 million pounds worth, before it is shipped out to customers.
In October 2001, Leprino began an investigation because of complaints about the suspicious flavor in its cheeses. The offending cheese was traced to a third-party warehouse in Pennsylvania. The cheese was recalled and new cheese sent out.

"Leprino executives investigated and noted a strong odor and an objectionable off-flavor in the cheese stored in the Pennsylvania warehouse," the 6th Circuit explained. "Also noted in the warehouse were spills of fruit juice concentrate on the sides of 55-gallon juice concentrate barrels, on the floor, and on pallets on which food was stored, and generally all over the warehouse. Numerous popsicle products appeared to have been smashed by forklifts in the warehouse. Leprino employees testified that they noted stagnant air and a strong odor in the warehouse."

The cheese was tested and found to have been contaminated by a handful of chemicals, making it unfit even for feeding to animals. 8.22 million pounds of it was then dumped and the battle over whether the loss was covered began.

Leprino’s policy excluded coverage for "contamination including but not limited to pollution; or shrinkage; all unless such damages directly results from other physical damage not excluded by this Policy."

After the denial of the insurance claim, Leprino filed suit in Colorado federal court arguing, “first, that the insured cheese was covered under the express terms of the FM policy, and second, that Leprino had a reasonable expectation of coverage under the FM policy such that it had coverage for all changes in flavor for its cheese," according to the 10th Circuit opinion.

Factory Mutual argued that because the chemicals altered the taste and smell of the cheese, meaning Leprino's loss was not covered. Leprino argued the loss was covered under the "other physical damage" portion of the policy.

The lower court judge issued summary judgment on the first claim, saying the cheese was clearly contaminated. The second claim of whether Leprino reasonably expected coverage was put to a jury, which ultimately decided that Leprino's expectation of coverage was unreasonable.

Leprino appealed the summary judgment and the jury verdict. Factory Mutual appealed the submission of the second claim to the jury.

The 10th Circuit reversed the judge's grant of partial summary judgment and remanded the case for a new trial because the trial judge improperly assumed that the cheese was clearly contaminated and thus excluded the parties from presenting evidence about exactly what caused the mozzarella to go bad.

"Factual disputes exist as to what precisely caused the contamination, despite FM’s suggestion that there was an insufficient amount of fruit concentrate to damage such large quantities of cheese," the 10 Circuit said. "We note that this argument also relates to disputed facts. Accordingly, we hold that the district court erred when it granted partial summary judgment to FM and when it excluded evidence regarding the application of the exception to [the "other physical damage" exclusion]."

Because that decision was in error, the 10th Circuit said it did not need to address the rest of Leprino's claims of error. The court also rejected Factory Mutual's cross-appeal.

The 10th Circuit reversed the partial summary judgment and the denial for a new trial. It vacated the judgment in favor of Factory Mutual, remanded the case for a new trial and denied Factory Mutual's cross-appeal.

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