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

While the manufacturer of the contaminated multi-brand pet foods that have caused an unknown number of pet deaths and illnesses wants to put the controversy behind it, 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, 2007, Menu Foods held a press conference to report that the toxic compound that contaminated the 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 estimates that the massive recall of its products could cost between $30 million and $40 million.

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

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; the distributors; and the 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 companies in addition to Menu Foods.

The situation should be “a real eye opener” for many manufacturers, believes Dave Golden, director of Commercial Lines, for the insurer trade group, the Property and Casualty Insurers Association of America (PCI). “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. “And 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, their 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 over 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.

“There’s really a lot to it — you have to look at the specific value to the owner,” maintains 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 the company’s 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 suggests it may become an insurance opportunity since 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 PETA (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.

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 it 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 December 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 states.

Edelson said he doesn’t want all of the pet food returned to Menu Foods and destroyed because that would be destroying 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. People want change in the industry; they want quality control markers and independent verification,” he said.

Rottinghaus said there might be multiple insurance issues depending on what the manufacturers are covered for and what they’re not covered for. He added the transferred contractual liabilities could delay the entire process.

Insurance Information Institute spokesperson 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,” Wilkinson said.

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