Hunton Retail Law Resource

On the heels of a recent $5 million civil penalty, the CPSC recently secured a $1.5 million civil penalty with help from the U.S. Department of Justice (“DOJ”). The civil penalty concludes a long saga between the CPSC and a large arts and crafts retailer about vases with allegedly defective thin glass that rendered them prone to shattering.

In 2015, the DOJ and the CPSC filed a complaint asserting claims against the retailer for failure to report and for a material misrepresentation to the CPSC. The complaint alleged that the retailer received consumer reports in 2007 and 2009 about laceration injuries stemming from the glass vases, yet delayed reporting them to the CPSC until 2010. The complaint further alleged that the retailer misled the CPSC by implying that another company imported the glass vases in the report when in reality the retailer served as the importer. In 2017, the complaint was amended to withdraw the material misrepresentation claim, citing a desire “to focus on the most critical issue at the heart of the case—the [failure to report] violations.” In February 2018, the parties entered into a consent decree and settled the lawsuit. The retailer agreed to pay a $1.5 million civil penalty, maintain a compliance program and implement internal controls and procedures to ensure timely, complete and accurate reporting to the CPSC.

In other news, a recent study may worry manufacturers, distributors and retailers of hoverboards. Hoverboards have been the subject of unfavorable headlines almost since their market introduction given the reports of battery packs that overheat and catch fire while charging. Now, a recent study by the American Academy of Pediatrics reveals trends for hoverboard injuries as compared to skateboard injuries using reported data. The study estimates there were about 27,000 hoverboard injuries compared to about 121,000 skateboard injuries to children during 2015 and 2016. For both products, boys ranging in age from 11 to 13 years were most commonly injured, suffering from fractures, contusions, sprains and/or strains to the wrist, forearm and head. The study found only two major differences between hoverboard and skateboard injuries: (1) there were about 4.5 times more estimated skateboard injuries than hoverboard injuries, and (2) hoverboard injuries more likely occurred at home whereas skateboard injuries more likely occurred on the street. Although the study estimates that hoverboard injuries are only a fraction of skateboard injuries, the CPSC may point to this study as a justification to modify warnings on hoverboard packaging or to push for redesigned hoverboards that minimize these injuries, especially head injuries.

Attorneys from Hunton Andrews Kurth LLP’s Insurance Coverage practice group weigh in on several recent recall and product contamination insurance coverage disputes.

On February 26, 2018, an Idaho federal district court granted in part an insurer’s motion to transfer a recall-related coverage lawsuit from Idaho to New York. The decision underscores the importance of reviewing all insurance policies for choice-of-law or forum selection clauses, which courts can enforce against parties that are not signatories to the insurance contract. In Green Technology v. Liberty Surplus Insurance Corp., No. 1:17-cv-00432.DCN (N.D. Idaho Feb. 26, 2018), a Georgia-based lighting manufacturer, GTLC, was informed by a customer in late 2015 that some of its light bulb retail products were defective. After determining that the bulbs posed a potential risk to customers, GTLC recalled approximately 400,000 light bulbs. GTLC sought coverage from Liberty Surplus Insurance under a Product Recall Insurance Policy for over $900,000 in costs and expenses associated with the bulb recall. The Liberty policy included a New York choice-of-law and forum provision.

Liberty denied coverage for the claim, arguing that the policy provided “Product Recall Expense Coverage,” not “Product Recall Liability Coverage,” and that GTLC had asserted a recall liability claim. GTLC filed a coverage lawsuit in Idaho federal court against both Liberty and its insurance brokers seeking to recover its losses associated with the recall under the policy. Liberty filed a motion to transfer the Idaho coverage action, arguing that the policy’s forum-selection clause required that GTLC’s suit be filed in the Southern District of New York. The Idaho court enforced the forum selection clause, holding that GTLC’s claims against Liberty should be severed from the claims against the brokers and moved to New York. In so holding, the court found that all claims asserted by GTLC in the coverage lawsuit were subject to the policy’s forum selection clause, even those claims asserted against GTLC’s brokers. The court held that the brokers’ actions were “closely related to the contractual relationship between GTLC and Liberty” and, as GTLC’s agents, they could foresee that a dispute over the policy might arise and subject GTLC’s claims to a New York forum. But given that the brokers were not parties to the insurance contract, the court had to apply an independent balancing of private and public interests relevant to the non-contracting parties. After balancing those interests, the court determined that the brokers’ interests “marginally” favored the Idaho forum. Given this conflict, the court determined that severance of the claims against Liberty and brokers was appropriate. Read the full opinion.

Applying New York’s “exceedingly broad” duty to defend, a New York federal court recently awarded more than $1 million to an insurer that defended a trucking company, M&T, in a lawsuit that should have been defended by another insurer under a different policy. The underlying lawsuit alleged that M&T delivered contaminated milk to a customer, which resulted in subsequent contamination of hundreds of thousands of pounds of cheese and milk. M&T provided notice of the customer’s claim to its general liability insurer, Harleysville, and business auto insurer, Wesco. Both insurers raised numerous coverage defenses, but ultimately only Harleysville agreed to defend M&T under a reservation of rights. Wesco denied coverage, arguing that the contamination losses did not involve property damage caused by an “accident” and that the claim was barred by several exclusions.

Harleysville then filed a declaratory judgment lawsuit against Wesco, claiming that it had no duty to defend or indemnify M&T and that Wesco’s policy, not Harleysville’s, covered the type of “accident” at issue in the contamination lawsuit. The district court agreed and granted Harleysville’s motion for summary judgment, holding that Wesco failed to carry its burden that its policy with M&T did not cover the underlying incident. In reaching its decision, the court emphasized the “exceedingly broad” scope of an insurer’s duty to defend under New York law. The ruling highlights the importance of reviewing and providing notice under all policies that might apply to a loss, which may trigger an insurer’s duty to defend based only on the “potential” for coverage for the underlying claim. Read a copy of the decision in Harleysville Worcester Insurance Co. v. Wesco Insurance Co., et al., No. 16-cv-7304 (S.D. Mar. 28, 2018).

In a second recall case turning on the interpretation of “accident,” a Massachusetts trial court granted a seafood processor’s renewed motion for summary judgment in a dispute regarding coverage under a commercial general liability (“CGL”) policy for more than 57,000 pounds of spoiled scallops. RSI, a seafood processing company, received a batch of scallops for processing and observed during transit that they were spoiled. Further investigation and inspections by RSI and the FDA confirmed another batch of scallops processed around the same time were also damaged. Shortly thereafter, RSI was sued by its customer, Atlantic, which alleged that the damage to the scallops was caused by RSI’s negligence.

RSI’s CGL insurer, Hanover, agreed to defend RSI in the lawsuit under a reservation of rights, but filed a declaratory judgment action seeking a ruling that it owed no coverage under the policy because the damage to the products was not caused by an “occurrence” and RSI’s claims were barred by numerous exclusions. The parties filed cross-motions for summary judgment. The trial court ruled in Hanover’s favor, but an appellate court reversed and remanded. On remand, the court granted RSI’s renewed motion, finding that the damaged scallops were caused by an “unexpected happening,” and thus an “accident,” rather than as part of RSI’s ordinary work process. The court also rejected Hanover’s reliance on several exclusions, finding that they were inapplicable under the undisputed facts of how the damage occurred. Read the opinion in Hanover Insurance Group, Inc. v. Raw Seafoods, Inc., No. 139260 (Mass. Super. Ct. Jan. 22, 2018).

Last month, we reported on the Blessings seafood contamination action pending before a New York federal district court, where Blessings sought to recover losses associated with contaminated raw shrimp products. On March 1, 2018, Blessings’ attorney notified the court that the parties had reached a settlement, pending execution of a final written agreement. On March 8, the court entered an order dismissing the case subject to the underlying settlement being achieved within 30 days.

Total Recalls: 26

Hazards: Fire/Burn/Shock (12); Injury (5); Laceration (3); Fall (2); Choke (1); Crash (1); Child Resistant Closure Requirement (1); Failure to Alert (1)

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