Eighth Circuit Vacates Previous Decision and Finds No Coverage for Trade Embargo
Spring 2007
Published in Property Insurance Law Committee Newsletter, Spring 2007. Copyright © 2007 by the American Bar Association. Reprinted with permission.
After first reversing a decision finding coverage, the Eighth Circuit U.S. Court of Appeals vacated its previous decision and issued an opinion on October 13, 2006, declaring that a food company’s loss of income due to an embargo on Canadian meat for fear of mad cow disease contamination did not amount to a direct physical loss required by a property and business interruption policy.[1] The insured, Source Food, was in the business of selling beef with the cholesterol removed. Source Food’s sole beef supplier was a company that manufactured and packaged the beef product in Canada using Source Food’s patented manufacturing process. Because of concerns related to Mad Cow Disease, the U.S. Department of Agriculture closed the border to Canadian beef.
At the time of the embargo, one truckload of beef product had been loaded for shipment to Source Food. By contract, the risk of loss for that truckload had transferred to Source Food. The product, however, was not allowed to enter the U.S. This resulted in a shut-down in Source Food’s business until it could obtain an alternate supplier.
Initially, the U.S. District Court for the District of Minnesota found that Source Food suffered no direct physical loss to property because the beef product suffered no physical contamination.[2] On appeal, however, the Eighth Circuit, by majority, reversed the district court holding that “Source Food was denied the use of its product due to circumstances beyond its control ... It has suffered a direct, physical loss of its beef.”[3] In fact, the majority said whether the beef was actually tainted was not controlling, it was treated as tainted by the U.S. government and that was sufficient.[4]
After issuing its decision, however, the Eighth Circuit granted USF&G’s motion for rehearing and vacated its previous decision in favor of Source Food.[5] In doing so, it also affirmed the district court’s conclusion that Source Food suffered no direct physical loss to property because the beef product suffered no physical contamination.
In support for its finding, the court relied heavily on a previous Eighth Circuit decision, Pentair, Inc. v. Am. Guarantee & Liab. Inc. Co.,[6] involving contingent business interruption. In Pentair, an earthquake caused a loss of power to two Taiwanese factories, leaving the factories unable to supply products to a subsidiary of Pentair for two weeks. Pentair argued that the property of the Taiwanese factories suffered a “direct physical loss or damage” when the power outages prevented the factories from performing their function of manufacturing products. Although the court noted in Pentair (and again in Source Food), that “once physical loss or damage is established, loss of use or function is certainly relevant in determining the amount of loss, particularly a business interruption loss,” it refused to adopt the position that “direct physical loss or damage is established whenever property cannot be used for its intended purpose.”[7]
In analogizing Pentair to the matter at hand, the Eighth Circuit explained that Source Food had not experienced a “physical loss” merely because the beef could not be used for its intended purpose:
Although Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not – as Source Foods concedes – physically contaminated or damaged in any manner. To characterize Source Food’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.[8]
The court also distinguished case law relied upon by Source Foods, Gen. Mills, Inc. v. Gold Medal Ins. Co.[9] (sixteen million bushels of General Mill’s raw oats were in violation of FDA regulations) and Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co.,[10] (smoke from a nearby fire violated the sanitation requirements of the government contract) on the fact that actual contamination was found in those instances. The court further distinguished these two cases based on the language of the respective policies compared to the language in the Food Source policy. The policy at issue in Gen. Mills required “direct physical loss or damage to property”[11] for coverage, and the policy at issue in Marshall covered “all loss or damage by fire.”[12] The Source Food policy, on the other hand, required “direct physical loss to property.”[13] The court explained how the policy’s use of the word “to” in the policy language was significant:
Source Food’s argument might be stronger if the policy’s language included the word “of” rather than “to,” as in “direct physical loss of property” or even “direct loss of property.” But these phrases are not found in the policy. Thus, the policy’s use of the words “to property” further undermines Source Food’s argument that a border closing triggers insurance coverage under this policy.”[14]
Accordingly, the court held that Source Food could not recover the loss of business income resulting from the embargo on Canadian beef under an insurance policy provision requiring a suspension of operations caused by “direct physical loss to Property” and affirmed the judgment of the district court.
[1] Source Food Technology v. USF&G Co., 465 F.3d 834 (8th Cir. 2006).
[2] Source Food Technology v. USF&G Co., No. 05-634, 2005 U.S. Dist. LEXIS 32438 (D. Minn. Dec. 7, 2005).
[3] Source Food Technology v. USF&G Co., 460 F.3d 995 (8th Cir. 2006).
[5] Interestingly, Judge Grunder, who wrote a dissent in the first opinion, wrote the revised opinion. And, Judge Heaney, who wrote the original decision that was subsequently vacated, resigned while the matter was pending.
[6] 400 F.3d 613 (8th Cir. 2005)
[8] Source Food, 465 F.3d at 838.
[9] 622 N.W.2d 147 (Minn. Ct. App. 2001).
[10] 98 N.W.2d 280 (Minn. 1959).
[11] Gen. Mills, 622 N.W.2d at 151.
[12] Marshall, 98 N.W.2d at 285.
[13] Source Food, 465 F.3d at 835 – 836.
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