An insurer for a California probiotic supplier will not be required to cover damages from the supplier's incorporation of the wrong probiotic into a health supplement.
Under a Wisconsin Supreme Court ruling, the insurer for California-based Nebraska Cultures and the insurer for Jeneil Biotech Inc. are not responsible for paying for damages arising from the error of the suppliers.
The Wisconsin Supreme Court ruled in a 3-2-majority ruling in early
March. The ruling in Wisconsin Pharmacal Company LLC v. Nebraska
Cultures of California Inc. stated that the “incorporation of a defective
ingredient into the supplement tablets did not damage other property,” under
the policy of insurance.
“We conclude that there is no ‘property damage’ caused by an
"occurrence" because the incorporation of a defective ingredient into
the supplement tablets did not damage other property and did not result in loss
of use of property,” Chief Justice Patience Drake Roggensack said in her
opinion.
Nebraska Cultures declined requests for comment. Attorneys for Jeneil,
Nebraska Cultures and Nebraska Cultures’ insurer, The Evanston Insurance Company, did not respond to requests for comment. The attorney with Hinshaw & Culbertson LLP for Jeneil's insurer, The Netherlands Insurance Company, said he could not discuss the
case.
Wisconsin Pharmacal Co., a maker of probiotic supplements for a major
retailer, contracted with Nutritional Manufacturing Services LLC for a specific
probiotic: Lactobacillus rhamnosus (LRA).
Nutritional Manufacturing Services then contracted with Nebraska
Cultures of California, who also contracted with Jeneil Biotech for the LRA.
Finally, Nebraska Cultures sold the Jeneil Biotech-supplied probiotic to
Nutritional Manufacturing.
Nutritional Manufacturing blending the probiotic with other ingredients
to form the supplement tablets and they were shipped for packaging back to
Wisconsin Pharmacal and sent to the retailer.
However, independent testing showed that Jeneil Biotech supplied a
different probiotic— Lactobacillus acidophilus (LA)— and the retailer had to
recall the product. The supplement chewable tablets were destroyed.
Wisconsin Pharmacal filed suit against Nebraska Cultures, Jeneil and
their insurers, but a trial court dismissed the claims against the two
suppliers.
Nebraska Cultures’ insurance company, Evanston Insurance Co., provided
coverage for losses from “bodily injury” or “property damage” caused by an
“occurrence,” with property damage being defined as “physical injury or
destruction or tangible property or lose of use of tangible property.”
In this case, California courts consider whether the product is
hazardous. If it is, then it is automatically considered property damaged. However,
this supplement was not found to be hazardous.
Jeneil’s insurance company, The Netherlands Co., provided coverage for
losses from “bodily injury” or “property damage” caused by an “occurrence,”
with property damage being defined as physical injury to property or loss of
use of tangible property.
“While Jeneil argues that the incorporation of a defective ingredient
rendered the tablets and other ingredients useless, thereby constituting loss
of use, Pharmacal did not actually lose use of the tablets,” Roggensack said.
“Instead, Pharmacal permanently lost the entire value of the tablets.
Accordingly, we conclude that the Netherlands policy does not provide coverage
because there is no property damage due to "loss of use of tangible
property that has not been physically injured."
According to the court, blending a defective ingredient with other
ingredients to create the supplement tablets formed an “integrated system.” Because
the ingredients could not be separated from each other, any injury was to the
integrated system itself and no other property.
There was no evidence that using LA physically altered the other
ingredients if LRA had been used instead, therefore, there was no property
damage.
“Stated otherwise, upon blending LA, rather than LRA, with other
ingredients, all of the ingredients were integrated into one product, the
tablets,” Roggensack said.