H.P. Hood LLC v. Allianz Global Risks US Insurance Co.

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14-P-1605 Appeals Court

H.P. HOOD LLC vs. ALLIANZ GLOBAL RISKS US INSURANCE COMPANY.

No. 14-P-1605.

Suffolk. September 2, 2015. - November 2, 2015.

Present: Meade, Wolohojian, & Milkey, JJ.

Contract, Insurance. Insurance, "All risk" policy, Construction
of policy, Coverage, Property damage. Practice, Civil,
Summary judgment.

Civil action commenced in the Superior Court Department on
November 5, 2010.

The case was heard by Christine M. Roach, J., on motions
for summary judgment.

Steven L. Schreckinger for the plaintiff.
Kristin A. Heres for the defendant.

MILKEY, J. Plaintiff H.P. Hood LLC (Hood) suffered various

losses when a bottled beverage it was producing for another

company failed certain quality control measures. At issue is

whether those losses are covered by the "all risks" property

insurance policy that Hood had purchased from the defendant,
2

Allianz Global Risks US Insurance Company (Allianz). On cross

motions for summary judgment, a Superior Court judge ruled in

Allianz's favor, concluding that Hood's losses fell within

certain exclusions to the policy. Because we agree that any

potentially covered losses are excluded, we affirm.

Background. The product. The essential facts are not in

dispute. The product at issue is a milk-based specialty drink

marketed by Abbott Laboratories (Abbott) under the trade name

Myoplex. Myoplex is a "shelf stable" beverage, meaning that it

is designed to require refrigeration only after its bottles are

opened. In order to ensure that the product does not spoil

before that, it must be manufactured and bottled under strict

aseptic conditions, and its bottles must stay hermetically

sealed until consumers open them.

The contract between Hood and Abbott. In November of 2008,

Abbott and Hood entered into a contract under which Hood would

produce at least forty million bottles of Myoplex in the first

year. The contract, which was termed a "contract packaging

agreement," required Hood to conduct quality control testing.

Attachments to the contract, and subsequent written and oral

agreements, added specificity to the particular tests and

protocols that Hood agreed to use. Some of the required testing

was designed to ensure that the Myoplex was contaminant-free

during the production and bottling process (that is, up until
3

the point the bottles were ready for distribution). None of

that testing revealed any contamination or other problems in any

of the relevant bottles.

Other testing was designed to ensure that the Myoplex

bottles would stay hermetically sealed after they left the

bottling plant and faced the rigors of transport to eventual end

users. One such test, known as the secure seal test, examined

whether bottles submerged in water retained their seals even

after the pressure inside the bottles was increased. Because

this test involved puncturing the bottles (to increase the

pressure inside them), it is known as a destructive test.

The May, 2009, production run. Hood began a production run

of Myoplex on May 14, 2009. Two days later, a bottle in that

run failed the secure seal test, meaning that the bottle did not

sustain its hermetic seal after the pressure inside the bottle

was increased. Production therefore was suspended. After

tentatively concluding that the problem likely was isolated,

Hood resumed production. However, on May 18, 2009, another

bottle failed the secure seal test. As a result, production was

suspended again, and Hood conducted extensive investigation in

accordance with its quality control protocols. By May 26, 2009,

further secure seal testing indicated a failure rate of

approximately seven percent. Hood utilized a nondestructive
4

test known as Taptone testing to try to isolate the problem, but

it was unable to do so.

On May 27, 2009, Hood reported its preliminary results to

Abbott, which responded that it would not accept bottles from

the May, 2009, production run. Hood then conducted additional

testing and investigation. In all, Hood performed secure seal

tests on 5,994 bottles, with 538 failures (a nine percent

failure rate). Hood also confirmed that it could not isolate

the bottles that were potentially problematic from those that

were not. Based on such results, Hood and Abbott agreed that

none of the almost two million bottles from the May, 2009,

production run could be marketed, and those bottles were

destroyed.

Subsequent investigation revealed that the problem had to

do with the bottle caps that Hood was using. Specifically, Hood

discovered that the liner in the caps became more slippery over

time, something that affected the amount of torque needed to

seal the bottles properly. Because the production process used

during the May, 2009, run did not take into account the

particular age of the bottle caps that were being used at any

given time, this meant that some bottle caps did not receive

optimal torque when the bottles were capped.

Discussion. Whether the insurance policy here provided

coverage is a legal question amenable to resolution on summary
5

judgment. See Cody v. Connecticut Gen. Life Ins. Co., 387 Mass.

142, 146 (1982).

The policy in question delineated its coverage as follows:

"Subject to the terms, conditions, exclusions and
limitations contained herein or endorsed hereon and in
consideration of the premium paid, this 'policy' covers all
risks of direct physical loss or damage to Insured Property
at Insured Location(s), provided such physical loss or
damage occurs during the Policy Period."

Allianz argues, as it did below, that based on this language,

actual property damage must occur before coverage is triggered

and that only such damage is covered by the policy. It points

out that there was no evidence that even one Myoplex bottle lost

its hermetic seal or otherwise sustained physical damage (other

than those bottles that went through the secure seal testing)

before Hood made a business decision to destroy the May, 2009,

production run. According to Allianz, the secure seal testing

showed, at most, a higher probability that bottles from the May,

2009, run later could become damaged in transit.1 Allianz

1
As Allianz notes, there is material in the record that
raises doubts about the accuracy of secure seal testing as a
predictor of whether bottles of Myoplex would have lost their
hermetic seals during distribution and transport. In fact,
after Hood's bottle supplier questioned the appropriateness of
using secure seal testing on noncarbonated beverages, Hood
stopped using such testing. In addition, without questioning
the reasonableness of Hood's business decision acquiescing to
Abbott's refusal to accept bottles from the May, 2009,
production run, Allianz does maintain that the bottles in fact
legally and safely could have been released to the market. For
this proposition, Allianz cites to material from the Food and
6

contends that, as a matter of law, a mere increased risk of

future property damage is not itself covered by the policy here.

See Tocci Bldg. Corp. v. Zurich Am. Ins. Co., 659 F. Supp. 2d

251, 259 (D. Mass. 2009) ("It is impossible to read the ['all

risks'] insurance policy [at issue there] as providing coverage

for 'risk' in the absence of a 'damage'"). See also HRG Dev.

Corp. v. Graphic Arts Mut. Ins. Co., 26 Mass. App. Ct. 374, 377

(1988) (defect in title to boat not covered by "all risks"

policy because policy covered only "physical losses and

damages").

In response, Hood argues in effect that special

considerations should apply in cases that involve products

designed for human consumption.2 In that context, Hood contends,

the requisite property damage has occurred once doubts have been

raised as to the product's fitness for that purpose and the

Drug Administration, National Food Lab (a private company that
Hood hired to assess such issues), and Hood itself.
2
Hood additionally argues that the policy was intended to
cover increased risk of future physical loss or damage, not
merely actual physical loss or damage that occurs within the
policy period. That argument, which the motion judge seems to
have accepted, is at odds with the language quoted above. The
reference in that language to "all risks" being covered does not
change that conclusion, because in this context, that reference
signifies that the policy was intended to cover property damage
whatever its cause (subject to exclusion). See Audubon Hill S.
Condominium Assn. v. Community Assn. Underwriters of America,
Inc., 82 Mass. App. Ct. 461, 467 (2012) (analyzing whether
insurance policy covers loss for "all risks" or only for
"enumerated risks").
7

product thereby has lost value. For this proposition, Hood

cites to a string of cases from other jurisdictions.3 Allianz

seeks to distinguish such cases based on the particular language

of the insurance policies at issue in them, or the specific

facts regarding what prevented the product's marketability.

Allianz has also cited to cases that rejected the legal

proposition that Hood has put forward.4

Ultimately, we need not decide which side has the more

persuasive argument on whether property damage occurred, because

we agree with the motion judge that, in any event, any losses at

issue here fell within an exclusion to the subject policy. That

3
See S. Wallace Edwards & Sons v. Cincinnati Ins. Co., 353
F.3d 367, 374-375 (4th Cir. 2003) (destruction of product due to
safety concerns constitutes direct physical damage); Pillsbury
Co. v. Underwriters of Lloyd's, London, 705 F. Supp. 1396, 1399-
1400 (D. Minn. 1989) (insured's reasonable determination that
product may not be fit for human consumption equates to direct
physical loss); General Mills, Inc. v. Gold Medal Ins. Co., 622
N.W.2d 147, 150-152 (Minn. Ct. App. 2001) (inability to lawfully
distribute products because of failure to meet Food and Drug
Administration regulations establishes direct physical loss).
4
See Source Food Tech., Inc. v. United States Fid. & Guar.
Co., 465 F.3d 834, 838 (8th Cir. 2006) ("To characterize [the
insured's] inability to transport its truckload of beef product
across the border and sell the beef product in the United States
as direct physical loss to property would render the word
'physical' meaningless"). See also Silgan Containers, LLC vs.
National Union Fire Ins. Co. of Pittsburg, P.A., U.S. Dist. Ct.,
No. C 09-5971 RS, slip op. at 5-6 (N.D. Cal. Oct. 3, 2011),
revd. and remanded on other grounds, 543 Fed. Appx. 635 (9th
Cir. 2013) (decision to destroy cans of tomatoes because of a
"'risk' that they would develop problems" is not "physical
injury to tangible property").
8

policy included an express exclusion for "faulty workmanship,

material, construction or design, from any cause." We agree

with the motion judge that the plain language of this exclusion

applies to the bottle cap liner issue, whether that problem be

viewed as one of faulty "material" (the fact that the

characteristics of the bottle cap liners changed as they aged),

faulty "workmanship" (the failure by Hood to apply the correct

torque), or faulty "design" (the fact that the bottling process

did not take into account the changes to the liners as they

aged).5 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." Allianz

Ins. Co. v. Impero, 654 F. Supp. 16, 18 (E.D. Wash. 1986).6

5
Hood argues that the exclusion does not apply because the
defect here was not to its "product" but only to the product's
"packaging." In this regard, it places great reliance on the
fact that the agreement between Abbott and Hood defines the
"product" that Hood is producing as the Myoplex itself, and not
the packaged bottles of Myoplex. We agree with Allianz that
this definition is beside the point in determining the scope of
the relevant exclusion in the insurance contract between Hood
and Allianz (which makes no use of the term "product").
Moreover, regardless of why Abbott and Hood chose to define the
term "product" in a particular way in their contract packaging
agreement (something on which the parties have shed no light),
there is no doubt that Hood was producing bottled Myoplex for
Abbott and that the bottling was an essential aspect of what
Hood was producing.
6
The exclusionary language at issue in Impero, excluding
coverage for the "[c]ost of making good faulty or defective
9

Our analysis is not yet complete, because Hood additionally

argues that even if the defective workmanship exclusion applies,

it applies only to a limited extent. Specifically, Hood argues

that the exclusion at most precludes coverage only for the

bottle caps themselves and that other losses, such as the loss

of the product inside the bottles, are covered. It bases this

argument on the following language that precedes the language of

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 quoted language raises some interpretive challenges, and the

case law reveals the frustration that judges have felt in trying

to make sense of provisions that include such language (commonly

workmanship, material, construction or design," was similar to
the language that is before us. Most cases that have examined
the scope of defective workmanship exclusions similar to the one
before us have done so in the context of commercial general
liability (CGL) policies. Such cases have concluded that by
containing such an exclusion, the CGL policy was not intended to
cover "the risk that an insured's product will not meet
contractual standards." Thommes v. Milwaukee Mut. Ins. Co., 622
N.W.2d 155, 158-159 (Minn. Ct. App. 2001), affd, 641 N.W.2d 877
(Minn. 2002). See Hartford Acc. & Indem. Co. v. Pacific Mut.
Life Ins. Co., 861 F.2d 250, 253 (10th Cir. 1988) (policy "is
not intended to serve as a performance bond or a guaranty of
goods or services"). Although a CGL policy is aimed at
protecting against harm to third parties (and therefore presents
a different context from an all-risks property damage policy),
Hood has presented no convincing reason why the cases construing
the scope of similarly worded defective workmanship exclusions
should turn on the type of policy at issue.
10

known as "ensuing loss" or "resulting loss" provisions).7 On its

face, the language does not purport to reduce the breadth of the

exclusion; it states only that losses that are not excluded are

still covered, but only to that extent. At the same time, the

language does appear to recognize that some kinds of "resulting

physical loss[es] or damage" will be covered even though an

exclusion precludes recovery for other losses. Notably, Hood

does not argue that the resulting loss language sweeps back into

coverage all losses caused by faulty workmanship and, in any

event, such a reading would render the exclusion of no effect

(something the parties are presumed not to have intended).

Instead, the dispute is over what boundary the policy intended

to draw between those property losses caused by faulty

workmanship that are excluded from coverage, and those

"resulting" losses that are not, and on which side of that

boundary the losses here fall.

Existing cases characterize the scope of ensuing loss

language in somewhat different respects. Some cases emphasize

that such provisions provide coverage only with regard to

property damage that is "wholly separate" from the damage

directly caused by the excluded event without a break in the

7
For example, one appellate court has commented that "[a]t
first glance, the exclusion at issue here appears to be self-
contradictory gibberish." Lake Charles Harbor & Terminal Dist.
v. Imperial Cas. & Indem. Co., 857 F.2d 286, 288 (5th Cir.
1988).
11

chain of causation. Montefiore Med. Center v. American

Protection Ins. Co., 226 F. Supp. 2d 470, 479 (S.D.N.Y. 2002)

(claimed loss is not "wholly separate" where "collapse of the

very portion of the building that [was] . . . designed

defectively" constitutes damage). Other cases hold that there

can be coverage even as to damage that is not wholly separate

and independently caused, where that damage is different in

kind. Dawson Farms, L.L.C. v. Millers Mut. Fire Ins. Co., 794

So. 2d 949, 950-953 (La. Ct. App. 2001) (condensation damage to

crops stored in refrigerated facility covered as ensuing loss,

even though cost to repair facility's faulty construction

causing condensation was excluded).

Hood argues with significant force that it is entitled to

the benefit of a lenient interpretation, because the relevant

language at a minimum is ambiguous. See generally Hakim v.

Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 281-282

(1997) (when interpreting ambiguous exclusion to insurance

policy, insured is particularly entitled to benefit of such

construction). In the end, however, such an argument does not

aid Hood's cause. On the particular facts of this case, Hood

cannot prevail under any reasonable interpretation of the

resulting loss language. Even the case on which Hood places the

greatest reliance recognizes that "damage that falls under the

exclusion and the ensuing damage [that is covered] must be
12

separable events in that the damage and the ensuing loss must be

different in kind, not just degree." Holden vs. Connex-Metalna,

U.S. Dist. Ct., No. 98-3326, slip op. at 21 (E.D. La. Dec. 22,

2000), affd. in part, revd. in part on other grounds sub nom

Holden v. Connex-Metalna Mgmt. Consulting GmbH, 302 F.3d 358

(5th Cir. 2002). Whatever else can be said about the case

before us, it is not one where an excluded occurrence involving

initial property damage led to other property damage of a

different kind. To the extent that Hood suffered property

damage potentially subject to coverage, that loss was directly

caused by, and completely bound up in, the increased risk of

future spoilage indicated by the secure seal testing. Both

conceptually and practically, the losses entailed here cannot

reasonably be characterized as "separable."8 Instead, a problem

with the bottle cap liners directly rendered the entire product

8
Some argument can be made that "ensuing" losses are the
same as "indirect" losses. See Hanover New England Ins. Co. v.
Smith, 35 Mass. App. Ct. 417, 419 (1993). The policy before us
covered only "direct" physical losses and it included a separate
exclusion for "indirect or remote loss or damage," thus
potentially rendering the debate about the scope of the ensuing
loss provision beside the point. Allianz has not pressed this
argument, and we decline to reach it.
13

unsaleable. The loss of that product falls squarely within the

exclusion language.9

Judgment affirmed.

9
The judge also found that the losses here were excluded
under the separate "latent defect" exclusion. We need not reach
that issue. Similarly, we need not reach Allianz's argument
that the judge erred in ruling that a separate "recall"
exclusion was inapplicable.