Exclusions In Commercial Policies

Business persons in Dallas, Fort Worth, Grand Prairie, Arlington, Mansfield, Burleson, Cleburne, Weatherford, Mesquite, Garland, Richardson, or any other location in Texas will usually have a commercial insurance policy covering their business. The policies they have are usually referred to as commercial general liability (CGL) policies. The following case looks at a problem one insured had with coverage and serves as an example of why a business person should try to understand what the coverages and exclusions are in any policy of insurance that money is spent on.
The Court of Appeals, Dallas, issued an opinion on November 22, 2010, styled, Frito-Lay, Inc. v. Trinity Universal Company, Trinity Universal Insurance Companies, Trinity Lloyd’s Insurance Company, and Unitrin Property and Casualty Insurance Group. In this case the court eventually ruled in favor of the various insurance companies and against Frito-Lay based on exclusions in the insurance policy.
Here is some background. Adampac, a food packaging company, obtained a CGL policy from Lloyd’s and a commercial excess policy from Universal. During the policy period, Frito-Lay hired Adampac to repackage a Frito-Lay food product to be used in consumer testing. During the repackaging process, the Frito Lay product became contaminated or adulterated with a foreign substance from another product Adampac was packaging for another customer. The foreign substance was a wintergreen flavoring used in a non-tobacco product similar to snuff. Because of the contamination, the Frito-Lay product could not be used for consumer testing.
Frito-Lay sued Adampac for negligence and breach of contract. In the lawsuit, Frito-Lay and Adampac eventually stipulated to the court that: (1) Frito-Lay engaged Adampac to repackage finished food products to be used in a consumer testing program, (2) Adampac agreed to ship and deliver to Frito-Lay non-adulterated and non-contaminated food product, (3) Adampac agreed to maintain sanitary conditions at Adampac’s plant at all times, (4) Frito-Lay’s food product became adulterated and contaminated with a substance from another customer’s product while the Frito-Lay product was being opened and repackaged, (5) Adampac guaranteed its services would meet the standard of care in the performance of services for Frito-Lay including only shipping to Frito-Lay non-adulterated and non-contaminated food, and (6) Adampac had the duty to deliver Frito-Lay’s finished products in a good and merchantable condition and fit for the purpose for which they were intended – a consumer food taste survey. The parties stipulated Frito-Lay suffered $393,500.00 in damages because of the adulteration and contamination of its food product.
After a hearing the trial court found Adampac breached the standard of care required of a person engaged in the repackaging of food products and that Adampac’s acts and conduct proximately caused Frito-Lay’s damages. That the food product became contaminated while in Adampac’s “sole and exclusive” possession. And entered judgment for $393,500.00.
Frito-Lay attempted to collect the judgment against Adampac’s insurance companies who are the parties in this lawsuit.
The insurers denied coverage based on an exclusion in the CGL policy which said coverage did not apply to damages to “personal property in the care, custody, or control of the insured.” The parties had agreed that the damage to Frito-Lay’s food product occurred while the product was within Adampac’s “sole and exclusive possession and control.”
Frito-Lay took the position that the exclusion does not apply because the negligence that caused the damages did not relate to work performed on Frito-Lay’s product, but rather concerned work performed on the snuff product.
In ruling for the insurance companies the court stated:
“Here, the policy states plainly that it does not apply to damage to personal property in the “care, custody, or control of the insured.” It is undisputed that the property damage to Frito-Lay’s product occurred while the product was in Adampac’s possession while at Adampac’s facilities. Adampac was in exclusive actual physical control of both the facility where the product was damaged and the product that was damaged. In such cases, the phrase “care, custody, and control” allows no further interpretation. We conclude Lloyd’s conclusively established Adampac’s liability was for damage to personal property in Adampac’s care, custody, and control. Therefore, the exclusion applies.”
The court did not seem to have a hard time reaching a decision in this case and in fact, the way it reads, the court seemed to be upset that this case had progressed far enough as to get to them.