Pet food case raises product recall, ‘special property’ and new coverage

The manufacturer of the contaminated pet foods that caused an unknown number of pet deaths and illnesses may want to put the controversy behind it, yet the pet food maker along with insurers, lawyers and other manufacturers may be dealing with the ramifications of the tragedy for months and years to come.

On March 30, Menu Foods held a press conference to report that the toxic compound that contaminated its pet foods had been isolated and that all food made after March 16 was safe.

“That seemingly, cleared the way for us to address the problem, deal fairly with the pet-owners who had been injured, put our business back together, and move on,” said Paul Henderson, president and CEO of Menu Foods.

The Ontario, Canada-based company estimated that the massive recall of its products could cost between $30 million and $40 million.

However, that recall did not put an end to the insurance and legal questions — or opportunities — raised by the case, according to insurance industry experts.

Recalling the recall

In early March, Menu Foods recalled 60 million containers of its “cuts and gravy” style wet pet foods, sold under more than 100 store labels and major brands across North America.

At the heart of the problem, according to food safety experts, is a longtime practice among some overseas food product companies. The U.S. Food and Drug Administration said pet food producers in North America often go overseas for less expensive ingredients. One of those ingredients is wheat gluten, which is used as a thickening agent. When you open a can of dry food in gravy, that “gravy” is primarily wheat or rice gluten, according to Associated Press reports.

The gluten from at least one company was spiked with melamine, an industrial chemical used to make plastic and fertilizer that officials suspect was added to boost the protein rating. Melamine has no nutritional value but is high in nitrogen. Adding it to feed makes it appear to be higher in protein, bringing a better price for the makers of feed for stock animals such as pigs, chickens and fish, as well as companies that make food for household pets.

“We may have been the victim of mercenary contamination for the purpose of making the wheat gluten … have a higher protein content,” said Chem-Nutra’s Chief Executive Steve Miller in an open letter on the company’s Web site. “We assure you that we will never again do business with the supplier of the suspect wheat gluten.”

Once ingested by a pet, the melamine breaks down, crystallizing in the kidneys. Some animals were able to overcome the crystals. As many as 4,000 pets who died were not, according to the FDA.

There is no database that tracks pet deaths in the United States. However, the FDA said in late April that more than 17,000 cases had been reported, while the company has fielded 300,000 calls from consumers.

As of press time, rapid pet illnesses and deaths sparked the recall of 154 brands of pet food contaminated with the chemical.

Assessing liability

According to Lisa Harrington, vice president of education for the Florida Association of Insurance Agents, there are potentially three layers of contractual involvement in the case: the manufacturer, distributors and retailers.

“The waters could become very muddied throughout this process,” Harrington said. “It could trigger a general liability policy for each of the involved entities. It all depends on how they have transferred the liability.”

Harrington said the contractual agreement might assume liability, for example, if the product stays on a retailer’s or a distributor’s shelf for a certain period of time. “I would caution that contracts need to be checked thoroughly for ‘transferred liability,'” she added.

There are lessons in this case for other companies in addition to Menu Foods.

The situation should be “a real eye opener” for many manufacturers, said Dave Golden, director of commercial lines, for insurer trade group the Property and Casualty Insurers Association of America. “It’s a very interesting situation in that when this kind of case hits the news, it creates an opportunity for manufacturers in general to look at their products’ recall exposure,” Golden said. “They have to ask themselves how much insurance they can handle — and what they can do to minimize the risk.”

Golden said many manufacturers compartmentalize components of their operation, in essence protecting one segment from the risks of others. For Menu Foods, he said, its problem traverses all components of the operation.

‘Special property’ claims

U.S. courts have typically viewed pets as property and limited any recovery to the cost of the animal and veterinarian bills. Recovery for emotional distress regarding the loss of a pet is rare. But the Menu Foods case could change that, as some plaintiff lawyers are pushing the novel theory that pets are “special property” whose owners deserve compensation for emotional suffering.

Some newspapers have counted filings of more than 50 legal cases seeking class action status.

“There’s really a lot to it — you have to look at the specific value to the owner,” said attorney Jay Edelson of the Chicago law firm of Blim & Edelson, who filed a class action lawsuit on behalf of Dawn Majerczyk and others whose pets died after eating tainted product made at two of Menu Foods’ U.S. factories. “The special property issue is harder to win in court, but even when it comes to property, not all property is treated the same.”

If the concept of “special property” succeeds, PCI’s Golden suggested it may become an insurance opportunity, because as new types of liabilities emerge, insurers develop products that respond to those liabilities. “This may open the door to a new class of commercial insurance,” Golden noted.

Ethical treatment

Edelson said his firm is in discussions with animal law expert Bruce Wagman and with the group People for the Ethical Treatment of Animals, but added that he is not in a position to disclose the crux of their respective conversations.

Wagman wrote a law school casebook titled, “Animal Law,” that was published in 2001. “For the manufacturer, I suppose commercial general liability policies would cover anything that covers them for products liability,” Wagman said. “I’m not sure of the answer to the ‘special property’ question, other than that the same policies should cover them, assuming these types of damages are not exempted.”

Lori Kettler, PETA’s senior counsel for regulatory and investigative issues, said her group is trying to decide whether to get involved in any of the class action suits or bring its own. “These suits are generally about money and we’re not about the money — we’re about doing what’s right for the animals,” she said.

As of March 22, PETA claimed that at least 13 cats and one dog had been reported as having died of kidney failure after eating food manufactured by Menu Foods under several brand names, including Iams, Eukanuba, Science Diet, Nutro and several store brands. According to PETA, nine of those animals died after Menu Foods deliberately forced 40 to 50 dogs and cats to ingest toxic and lethal food in Menu Foods’ laboratory, where tests were allegedly performed seven days after the food contamination was reported.

The Associated Press reported in early March that Menu Foods’ recall was triggered, in part, after cats fell sick and died during routine company taste tests.

Fraud allegations

Plaintiffs in Edelson’s case allege that Menu Foods committed fraud. “We’re charging them with fraud and saying that they knew about [the problem] as far back as December 2006. So far, we have hundreds of clients and have received thousands of calls — and we think that will be our most compelling argument,” Edelson said.

The suit alleges that the company’s “initial misconduct” originated in Dec. 2006, when Menu Foods began to use a new supplier of wheat gluten from China. “Menu Foods knew or should have known that there have been problems with wheat gluten coming out of China becoming contaminated with lethal agents,” the filing stated.

Edelson said he doesn’t want all of the pet food returned to Menu Foods and destroyed because that would wipe out evidence.

Another class action law suit filed by Berding & Weil of Alamo Calif., concerns Diane Swarberg and her 12-year old cat, which apparently ate Iams Select Adult Bites for several years, but became ill in March. Swarberg took Oscar to her veterinarian who told her that the cat was suffering from kidney failure and should be euthanized.

Dan Rottinghaus, a partner in the Berding & Weil firm, said the victims involved in the case want compensation. “But that’s only part of it,” he added. “People want change in the industry. They want quality control markers and independent verification.”

Rottinghaus said there might be multiple insurance issues depending on what the manufacturers are covered for. He added that transferred contractual liabilities could delay the entire process.

Insurance Information Institute spokeswoman Claire Wilkinson said the Menu Foods case has major product liability implications, but the larger issue is the rampant litigiousness on a global scale.

“Where there’s a lawyer with a will, there’s a potential legal liability avenue,” she said.

The federal government’s investigation of the pet food remains active, and the Food and Drug Administration said it is continuing to follow leads to ensure that all contaminated product is removed from the market.

The Associated Press reports and Insurance Journal West Editor Patricia-Anne Tom contributed some of the facts and figures for this article.