(CN) – A ready-made burrito producer may not claim insurance on losses resulting from its shipment of bacteria-infested burritos, since the bacteria turned out to be harmless to humans, a federal judge ruled.
In early January 2010, frozen food manufacturer Little Lady began producing burritos for convenience stores using a new process that left the burrito partially uncooked when it left the factory.
Standard laboratory tests demanded by USDA regulations found that the burritos contained bacteria, but further specific testing was necessary to determine if the bacteria were harmful to humans.
When Little Lady learned of the bacteria in the burritos, it placed a hold on the 57,374 cases already produced. Further tests established that the bacteria were not harmful, but by the time these results came in, many cases of burritos had to be destroyed due to quality issues.
Little Lady made an insurance claim on its policy with Houston Casualty for accidental product contamination, claiming damages for the spoiled product and for the cost of the specific testing. Houston Casualty denied coverage, citing the lack of actual contamination.
Little Lady then sued the insurer for breach of contract, and both parties moved for summary judgment.
U.S. District Judge William Hibbler denied Little Lady’s motion and granted summary judgment to Houston Casualty.
Little Lady argued that the bacteria found in the burritos during general testing made it likely that a consumer would become sick by eating the product. Houston Casualty asserted that Little Lady’s assumption that harm might have occurred is irrelevant because there was never any actual danger.
The court found “only Houston Casualty’s interpretation to be reasonable.”
“Little Lady is essentially asking the Court to rewrite the policy to require a likelihood that a product is contaminated rather than a likelihood that the contaminant it does contain is dangerous. When taken to its logical extreme, Little Lady’s interpretation would allow the company to file a claim every time its products tested positive for bacteria of any kind,” Hibbler said.
Although Little Lady had to bear significant costs associated with the hold placed on its product, this “does not mean that those costs are losses covered by the policy,” he continued.
Little Lady had also claimed that if the insurance policy does not cover such costs, it will be forced to choose between risking the public’s health or going without insurance.
The court roundly rejected this argument. “Obviously, Little Lady has no such choice because it may not choose to risk the public health in this manner. That would be a violation of its USDA regulations,” the judgment said.
Hibbler added that Little Lady may be able to find an insurance policy that does provide the sort of coverage the company seeks from Houston Casualty, before emphasizing that “Houston Casualty is not to blame if it cannot.”