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Cheer Pack North America, LLC v. Valley Forge Insurance Co.

United States District Court, D. Massachusetts

April 28, 2017

CHEER PACK NORTH AMERICA, LLC, Plaintiff,
v.
VALLEY FORGE INSURANCE COMPANY and CONTINENTAL CASUALTY COMPANY, Defendants.

          MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT AND PLAINTIFF'S MOTION TO STRIKE

          F. Dennis Saylor IV United States District Judge.

         This is an insurance coverage dispute. Jurisdiction is based on diversity of citizenship. Defendants Valley Forge Insurance Company and Continental Casualty Company are insurance companies who have declined to defend their policy holder, plaintiff Cheer Pack North America, LLC, in litigation. The litigation concerned food contamination allegedly caused by the failure of packaging products manufactured by Cheer Pack.

         Cheer Pack manufactures flexible pouches used to package and process various food products. It sold pouches to Plum, a manufacturer of organic baby foods, which in turn had a manufacturing agreement with SunOpta, a food processor. In 2013, various Plum products manufactured and processed by SunOpta using Cheer Pack pouches became contaminated with bacteria when the pouches allegedly failed to maintain a hermetic seal during processing. The contamination resulted a voluntary recall of millions of Plum products.

         Plum subsequently filed suit against both SunOpta and Cheer Pack, and SunOpta then filed a cross-claim against Cheer Pack. Valley Forge and Continental declined to defend Cheer Pack in that litigation, contending, among other things, that the relevant insurance policies contain an exclusion for bodily injury or property damage arising out of “microbe” exposure. Those exclusions, however, contain an exception for insureds whose “business is food processing.” Cheer Pack contends that its business is food processing, and therefore the exception to the exclusion should apply.

         The parties have cross-moved for partial summary judgment on defendants' duties to defend. Cheer Pack has also moved for summary judgment on defendants' affirmative defense of misrepresentation. For the reasons stated below, the motion of Cheer Pack will be granted as to the duty to defend, and denied without prejudice as to the misrepresentation defense. Defendants' motion for partial summary judgment as to their duties to defend will be denied.

         I. Background

         A. Factual Background

         1. The Parties

         Cheer Pack North America, LLC is a manufacturing company located in West Bridgewater, Massachusetts. It manufactures and sells flexible pouches with screw caps. The pouches are used in the manufacturing, processing, and packaging of various food products, including baby food, fruit purees, yogurt, condiments, pet food, and beverages. (Giovannone Aff. ¶¶ 3, 5).

         Many of Cheer Pack's pouches are used in a “hot fill” application, in which food is pasteurized after being filled in the pouch and heat-sealed, typically through a hot-water spray. (Id. ¶ 6). Cheer Pack is a corporate affiliate of Gualapack North America, Inc., and brokers the sale of Gualapack filling equipment used to fill the pouches. (Id. at ¶ 4-5). Cheer Pack also provides on-site guidance, technical support, and maintenance services in connection with the use of its pouches and the Gualapack filling equipment. (Def. Ex. 1 at p. 26 ¶¶ 17, 19).

         From January 1, 2013, through January 1, 2014, Valley Forge Insurance Company insured Cheer Pack under a commercial general liability policy. (Pl. Ex. C). During the same period, Continental Casualty Company insured Cheer Pack under a commercial umbrella policy. (Pl. Ex. D).

         2.The Insurance Policies

         Under the primary policy, Valley Forge is obligated to pay “those sums that [Cheer Pack] becomes legally obligated to pay as damages because of ‘bodily injury' or ‘property damage' to which this insurance applies.” (Pl. Ex. C at 1142). The policy also provides that Valley Forge had a duty to defend Cheer Pack “against any ‘suit' seeking those damages.” (Id.).

         The primary policy provides that it does not apply to claims of “bodily injury” or “property damage” “arising out of or relating to” contact with, exposure to, or the growth or presence of any “fungi or microbes.” (Id. at 1173). That exclusion does not apply, however, to claims involving bodily injury “where [the insured's] business is food processing, sales, or serving, and the ‘bodily injury' is caused solely by food poisoning in connection with such processing, sales, or serving.” (Id.).

         Under the umbrella policy, Continental is obligated to pay “on behalf of [Cheer Pack] those sums in excess of ‘scheduled underlying insurance, ' ‘unscheduled underlying insurance' or the ‘retained limit' that [it] becomes legally obligated to pay as ‘ultimate net loss' because of ‘bodily injury, ' ‘property damage' or ‘personal and advertising injury' to which this insurance applies.” (Pl. Ex. D at 0025). The umbrella policy also includes a duty to defend. (Id. at 0039).

         Like the primary policy, the umbrella policy excludes coverage for any injury caused by “the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of any ‘fungi or microbes.'” (Id. at 0029). Also like the primary policy, the “microbe” exclusion in the umbrella policy contains an exception for “microbes that cause food poisoning, if [the insured's] business is food processing, sales, or serving.” (Pl. Ex. D. at 0038).[1]

         3. The Underlying Claims

         The claims underlying this dispute arise out of a contractual relationship between Cheer Pack, Plum (a provider of organic foods and snacks), and SunOpta (a food manufacturer). (Pl. Ex. E. at ¶¶ 19-20). In 2011, Plum and SunOpta entered into an agreement in which SunOpta would manufacture, process, sanitize, and package Plum's products to Plum's specifications. (Id. at ¶ 22). As part of that agreement, SunOpta agreed to manufacture Plum products in packages made by Cheer Pack and to use filling equipment manufactured by Gualapack. (Id. ¶ 23). The Plum products that SunOpta agreed to produce included pureed fruit, vegetable, and grain combinations intended for consumption by babies and toddlers. (Id. ¶ 19).

         As part of the manufacturing process, SunOpta subjected filled Cheer Pack pouches to heat pasteurization, in which the pouches were held under a hot water spray for a minimum of three minutes. (Id. ¶¶ 39-40). Following pasteurization, the pouches were then cooled using cold water. (Id. ¶ 41). According to the complaint subsequently filed by Plum against SunOpta, between June and August of 2013, SunOpta did not adequately control or test the water in the cooling tower to minimize microbial contamination. (Id. ¶ 43). When testing was conducted in August 2013, it revealed the presence of substantial microbial growth in the cooling water. (Id. ¶ 46).

         In late September and early October of 2013, Plum and SunOpta began receiving complaints from customers that pouches of Plum's products were bloated or swollen, which is evidence of bacterial growth in the pouches. (Id. ¶¶ 49-50). Plum also received complaints from customers who had experienced gastrointestinal symptoms and discomfort. (Id. ¶ 3). On November 5, 2013, SunOpta notified Plum of the presence of microbial growth in the cooling water. (Id. ¶ 57). Three days later, Plum initiated a voluntary recall of all products manufactured at the SunOpta facility during the affected dates. (Id. ¶ 60).

         SunOpta acknowledged that it produced contaminated products for Plum and that the contamination occurred during the cooling process, but disclaimed any responsibility for the contamination. (Id. ¶¶ 82, 85). SunOpta alleged that Cheer Pack's pouches contained a defect that prevented them from maintaining a hermetic seal and that it was the failure to seal that caused the pouches to become contaminated during the cooling process. (Id. ¶ 86).

         Plum filed a complaint against SunOpta on February 3, 2015, alleging that SunOpta breached the manufacturing agreement by failing to ensure that its products were manufactured in a clean and sanitary environment, and sought damages on that basis. (Pl. Ex. M). Plum then filed an amended complaint on April 13, 2015, adding Cheer Pack as a defendant and alleging that it breached its express and implied warranties by selling pouches that failed to maintain a hermetic seal. (Pl. Ex. E at ¶¶ 132, 137). Plum also sought damages from Cheer Pack. (Id. ¶ 139).

         On May 4, 2015, SunOpta filed a cross-claim against Cheer Pack. (Def. Ex. 1). SunOpta alleged that the contamination was caused by the failure of the Cheer Pack pouches to seal properly. (Id. at 29 ¶¶ 35-38). SunOpta sought to recover damages from Cheer Pack related to the recall of contaminated pouches. (Id. at 54 ¶ 164).

         4.The Insurance Dispute

         On November 19, 2013-after the recall, but before Plum had filed suit-Cheer Pack notified its insurers of the potential claims against it. (Pl. Ex. I). On December 13, 2013, Valley Forge responded by letter, stating that it would investigate the matter, but that it retained the right to disclaim coverage. (Pl. Ex. J at 1011, 1014). After receiving a notification on May 20, 2014, that Plum had retained counsel to represent it in connection with the recall, Valley Forge and Continental wrote to Cheer Pack stating that they would “defend this claim under the reservation of rights below.” (Pl. Ex. K at 1025). The letter then set forth several bases on which coverage might be denied, including the microbial exclusion. (Id. at 1028). The insurers also reserved the right to re-evaluate the duty to defend if and when Plum filed a lawsuit. (Id. at 1033).

         On April 15, 2015, Cheer Pack notified the insurers that Plum had filed suit against it. (Def. Ex. 6). On May 8, 2015, Cheer Pack further notified the insurers that SunOpta had filed a cross-claim against it. (Def. Ex. 7). On May 26, the insurers informed Cheer Pack of their conclusion that “the Plum suit seeks damages that are not covered under the policies” and that they “therefore deny any obligation to defend or indemnify Cheer Pack with regard to the Plum suit.” (Bell Aff. Ex. O). As grounds for that denial, the insurers stated that: (1) the amended complaint did not include any allegations suggesting “bodily injury;” (2) the allegations may not satisfy the policies' definitions of “property damage;” (3) the allegations may not describe an ...


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