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No Insurance Coverage for Defective Additive to Women's Supplements

he Wisconsin Supreme Court ruled that a defective ingredient included in recalled health supplement tablets did not amount to “property damage” as covered under a commercial general liability insurance policy.

The court reversed an appellate court decision, ruling that the insurance companies were not required to cover the claims against two drug additive manufacturing companies.

Wisconsin Pharmacal (Pharmacal) supplies daily probiotic supplements to a major retailer.  Included in the supplement are various ingredients including the probiotic bacteria species Lactobacillus rhamnosus (LRA).

The ingredients for the supplement were supplied by Nebraska Cultures of California, Inc. (Nebraska Cultures) and Jeneil Biotech, Inc. (Jeneil), who were insured by The Evanston Insurance Co. (Evanston) and the Netherlands Insurance Co. (Netherlands), respectively.

Wrong additive supplied

The LRA Nebraska Cultures and Jeneil provided was actually Lactobacillus acidophilus (LA), rather than LRA.  The retailer notified Pharmacal that the supplement contained LA instead of LRA, which Pharmacal confirmed through its own independent testing.  As a result, the supplement was recalled and Pharmacal destroyed the tablets containing the defective LA ingredient.

For another insurance coverage story, see Insurance Company Breached Its Duty to Defend Even After Settlement

Pharmacal sued Nebraska Cultures and Jeneil, and its respective general liability insurers, Evanston and Netherlands for various tort and contract claims.  Nebraska Cultures and Jeneil moved to bifurcate the proceedings pending the circuit court’s determination on whether the insurance policies provided coverage for the loss of the defective supplement.  The insurance companies, Evanston and Netherlands, moved for summary judgement claiming that the insurance policies did not cover the defective supplement.

The Circuit court granted summary judgement for the insurers, but the court of appeals reversed finding the insurance policies did provide coverage for Pharmacal’s loss because the defective product constituted property damage and exclusions under the policy did not apply.

No coverage from liability insurance

The Supreme Court reversed again finding that the commercial general liability policy applied to physical injuries to tangible property caused by a defect in the product, but not to the product damaged itself.

The court wrote that the sole purpose of the damage to property clause is to “cover the risk that the insured’s goods, products, or work will cause bodily injury or damage to property other than the product…of the insured.”

The court further determined that the appeals court erred in not conducting an integrated systems analysis, which would have determined whether the damage caused by the defective ingredient could be separated out, treating the product as a unified whole.  If the defective ingredient could be separated out, the damage would constitute damage to property other than the defective component, which would be covered under the insurance policy.

The court found that in this case, the defective ingredient included in the supplement made a unified whole product, and damage to the whole product as an integrated system, in this case, damaged the tablets themselves and was not covered under the insurance policies.

Jeneil attempted to assert that packing and shipping materials associated with the tablets suffered physical injury constituting damages coverable by the policy.  The court rejected the argument, writing that no physical damage occurred to the shipping materials.

Exclusions further negates coverage

The court also determined that even if the defective supplement tablets were eligible as a damaged product under the insurance policies, the exclusions in the policies would negate the coverage.  In examining the exclusions of the insurance policies, the court wrote that a “diminution in value, even of worthlessness, is not the same as loss of use” and an inadequate product that fails to perform as intended is not property damage.  The court found that the insurance policies did not provide a clause for coverage for loss of use of property, and so the damaged tablets were not covered.

The court further referenced an insurance policy exclusion that precluded loss of use as damages arising out of the insured's negligent failure to perform its contractual obligations for coverage.

The court found that because there was no property damage caused by the incorporation of the defective LA ingredient, and because the exclusions in the insurance policy would negate coverage, Netherlands and Evanston were not responsible to cover the loss alleged by Pharmacal against Nebraska Cultures and Jeneil.

The case is Wisconsin Pharmacal Co. LLC v. Nebraska Cultures of California Inc. et al., case numbers 2013AP613 and 2013AP687, in the Supreme Court of Wisconsin.

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