ORtG^I^^I.Schottenstein, Zox & Dunn Co., LPA 250 West Street Columbus, OH 43215-2538 614-462-4938; fax 614-462-5135 [email protected]; [email protected] [email protected] Attorneys for

ORtGÎ^Î.

IN THE SUPREME COURT OF OHIO

HONEYBAKED FOODS, INC.

Plaintiff-Petitioner

vs.

AFFILIATED FM INSURANCECOMPANY

Defendant-Respondent

CASE NO. 2011-0391

CERTIFIED QUESTION FROMTHE U.S. DISTRICT COURT FORTHE NORTHERN DISTRICT OFOHIO WESTERN DIVISION

RESPONDENT'S PRELIMINARY MEMORANDUM ON CERTIFIED QUESTION

Alan G. Starkoff (0003286)Jeremy M. Grayem (072402)Amanda L. Wickline (0076807)Schottenstein, Zox & Dunn Co., LPA250 West StreetColumbus, OH 43215-2538614-462-4938; fax [email protected]; [email protected]@szd.com

Attorneys for Plaintiff/PetitionerHoneyBaked Foods, Inc.

CLERlt ®F COURTSUPREME COURT OF QHIO

David J. Fagnilli (0032930)(Counsel of Record)Richard M.Garner (0061734)Davis & Young1200 Fifth Third Center600 Superior Avenue, EastCleveland, OH 44114216-348-1700; fax 216-621-0602dfaQnillikdavisyoun .g comrgarner davisYoun.g com

Thomas S. Brown (PHV 1326-2011)(pro hac vice motion pending)Jennifer L. Seme (0080365)Gibbons P.C.1700 Two Logan Square18th and Arch StreetsPhiladelphia, PA 19103215-665-0400; tbrown ggibonslaw.com

Attorneys for Defendant/RespondentAffiliated FMInsuraoce Company

MAR 3 0 2o11

ULERK OF COURT$UPREME COURT ®F OH1O

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ....... .................................................................................................. ii

INTRODUCTION ...........................................................................:............................................. 1

BACKGROUND ........................................................................................................................... 2

LAW AND ARGUMENT ...................... ....................................................................................... 4

Standard of Review ............................................................................................................ 4

This Court should decline to answer the certified question because there iscontrolling precedent in the decisions of this Court . ......................................................... 4

This Court should decline to answer the certified question because the reasonableexpectations doctrine is not appropriately applied to the facts of this case . . ..................... 6

If the Court accepts the certified question presented, the question should bemodified . ............................................................................................................................ 9

CONCLUSION ............................................................................................................................10

TABLE OF AUTHORITIES

Page(s)

CASES

Anderson [sic] v. Highland House Co.,93 Ohio St.3d 547 (2001) ................................................................................................... passim

Aultman Hospital Assn. v. Hospital Care Corp.(1989) 46 Ohio St.3d 51, 544 N.E.2d 920 .................................................................................. 5

Cincinnati Ins. Co. v. CPS Holdings, Inc.,Cuyahoga App. Nos. 85967 and 85969, 2006-Ohio-713 ............................................................ 6

In Re All Kelley & Ferraro Asbestos Cases,104 Ohio St.3d 605, 2004-Ohio-7104, 821 N.E.2d 59, ¶29 ....................................................... 5

Inc. v. Selective Ins. Co. of South Carolina,6`h Dist. No. WD-06-058, 2007-Ohio-2258, at ¶46 .................................................................... 6

Kincaid v Erie Ins. Co.,2010-Ohio-6036 ¶20 ................................................................................................................... 4

Lager v. Miller-Gonzalez,120 Ohio St. 3d 47, 2008-Ohio-4838, 896 N.E.2d 666 at ¶1 5, 16 ............................................. 5

Park-Ohio Industries, Inc. v. The Home Indemnity Co.(1992), 975 F2d 1215, 1223 .........................:.............................................................................. 5

Plastech Engineered Products, Inc. v. Cooper-Standard Automotive, Inc.,No. 3:01 CV 7658, 2003 U.S. Dist. LEXIS 19155 (N.D. OH 2003) .......................................... 8

Shifrin v. Forest City Enterprises, Inc.,64 Ohio St.3d 635, 1992-Ohio-28 ........................................................................................... 1,4

Stephen J. Ware, Inc., A Critique of the Reasonable Expectations Doctrine,56 U.Chi.L.Rev. 1461, 1466 (1989) ........ ................................................................................... 8

Tuthill Energy Sys. v. Employers Ins. of Wausau,3`d Dist. No. 2-03-25, 2004-Ohio-1394, at ¶13; 1 G.H. II ................................................:......... 6

Wall v. Firelands Radiology, Inc.,106 Ohio App.3d 313, 327, 666 N.E.2d 235 .............................................................................. 8

Wallace v. Balint,94 Ohio St.3d 182, 2002-Ohio-480, 761 N.E.2d 598 ..................................................... 1, 5, 6, 7

OTHER AUTHORITIES

5 Jeffrey E. Thomas,Appleman on Insurance §§5.05 (2010) ....................................................................................... 7

RULES

S.Ct. Prac. R. 18.1 ........................................................................................................................... 4

INTRODUCTION

The United States District Court for the Northern District of Ohio Western Division, has

certified the following question of State law to the Ohio Supreme Court to be answered:

In light of the Supreme Court of Ohio's opinion in Anderson [sic] v. Highland

House Co., 93 Ohio St.3d 547 (2001), does the reasonable-expectations doctrineapply to a commercial general liability "all risk" insurance policy, so thatcoverage, which otherwise would be excluded under the terms and conditions ofthe policy, is afforded, provided the trier of fact determines that the insuredreasonably expected, when purchasing the policy, that the policy would cover theloss at issue.

Respondent respectfully requests that the Court decline to answer the certified question

because there is controlling precedent in a decision from the Ohio Supreme Court, Wallace v.

Balint, 94 Ohio St.3d 182, 2002-Ohio-480, 761 N.E.2d 598, which post-dates the Andersen

decision, wherein the opinion notes that a majority of this Court is not willing to accept the

"reasonable expectations doctrine." There is nothing in the nine years since the Wallace decision

was released that would indicate that the Court has changed its mind and is now willing to alter

clear and unambiguous written contracts between two sophisticated commercial entities to reach

a result contrary to the result that would be reached from a plain reading of the contract

language. In addition to the Wallace decision, well-settled principles of Ohio law clearly

establish that in a situation like this, the Court will find the intent of the parties in the expressed

written terms of the unambiguous contract. Shifrin v. Forest City Enterprises, Inc., 64 Ohio

St.3d 635, 1992-Ohio-28.

Altematively, if the Court is inclined to answer the certified question, Respondent

respectfully requests that the Court modify the question to fit the record and the facts in this case,

and would propose the following question:

Where a court finds that a property insurance policy unambiguously excludes theloss at issue, can a sophisticated insured, represented by an insurance broker,

invoke the reasonable expectations doctrine to permit the finder of fact toconclude that insurance coverage nevertheless exists based on a claim that theinsured reasonably and objectively expected, at the time that the insuredpurchased the policy, that the loss at issue would be covered by the policy?

BACKGROUND

Petitioner HoneyBaked Foods, Inc. ("HoneyBaked") is a food processor that processes

ready-to-eat hams and turkey breast at its Holland, Ohio facility. In November, 2006

HoneyBaked discovered that some of its food products were contaminated with Listeria

Monocytogenes ("Listeria"), a pathogenic bacteria. Through testing, HoneyBaked subsequently

determined that a hollow roller on a conveyer system it uses as part of its food processing

operation was likely the source of the Listeria contamination. As a result of this discovery,

HoneyBaked commenced a voluntary recall of the contaminated food products, and ultimately

segregated and destroyed one million pounds of processed ham and turkey.

HoneyBaked submitted a first party property insurance claim to Affiliated FM Insurance

Company ("Affiliated FM") seeking reimbursement for the value of the food products it

destroyed as well as asserting business interruption losses. Following an investigation, Affiliated

FM declined coverage for HoneyBaked's claim on several grounds, including the fact that the

policy at issue expressly excludes coverage for, inter alia, loss or damage caused by ...

"contamination ..." and further expressly excludes coverage for "loss or damage to stock or

material attributable to manufacturing or processing operations while such stock or materials are

being processed, manufactured, tested, or otherwise being worked upon."

HoneyBaked then commenced an action in U.S. District Court for the Northern District

of Ohio, Western Division against Affiliated FM seeking to recover the cost of the contaminated

food products it destroyed and also asserting a business interruption claim. After conducting

2

extensive discovery, the parties filed cross motions for summary judgment in the District Court

case. The summary judgment motions were briefed between July 16 and October 15, 2010.

In an order dated December 2, 2010 the District Court concluded that there is no genuine

issue of material fact; that HoneyBaked is seeking to recover for damage to its food products due

to contamination; that the clear and unambiguous language of the contamination exclusion of

the policy applies; that HoneyBaked's claim does not fit within the exception to the exclusion for

resulting direct physical loss or damage insured by the policy; and, therefore, HoneyBaked's

claim is not covered! The District Court found that "HoneyBaked has demonstrated neither a

factual dispute as to the cause of the contamination, nor that the contamination resulted from a

covered cause."

Despite finding that the policy "expressly excludes contamination," and was

unambiguous, the District Court went on to state:

"Because a jury could find HoneyBaked had a reasonable expectation ofcoverage, and because the policy unambiguously excludes losses caused bycontamination, the availability of coverage, notwithstanding the exclusion, turnson the question of whether the Ohio law will recognize the reasonableexpectations doctrine."

The District Court then ordered the parties to:

"[P]ropose a question or questions for certification to the Ohio Supreme Courtregarding whether, notwithstanding the failure of the policy at issue otherwise tocover the plaintiff's loss, such loss might be covered, contingent on jury findingsof disputed facts under Ohio law;"

The parties could not agree on a joint proposed question or questions for certification to

the Ohio Supreme Court, and each independently submitted proposals to the District Court.

Thereafter, the District Court certified a question to the Ohio Supreme Court for review.

' The District Court's December 2, 2010 Order ruling on the summary judgment motions andrequesting the parties provide a certified question for the Ohio Supreme Court is attached hereto.

3

LAW AND ARGUMENT

Standard of Review

S.Ct. Prac. R. 18.1 states:

The Ohio Supreme Court may answer a question of law certified to it by a courtof the United States. This rule may be invoked when the certifying court, in aproceeding before it, issues a certification order finding there is a question ofOhio law that may be determinative of the proceeding and for which there is nocontrolling precedent in the decisions of this Suprenie Court.

This Court, like any other court of law, decides actual controversies and does not provide

advisory opinions as to insurance coverage or any other issue. Kincaid v Erie Ins. Co., 2010-

Ohio-6036 ¶20. The rule requires that there be "no controlling precedent" from the Ohio

Supreme Court and that the issue is "determinative of the proceeding" in the federal court. In the

present case, as explained below, there is controlling legal precedent regarding insurance

contract construction and on the issue of the application of the reasonable expectations doctrine.

Further, application of the reasonable expectations doctrine to the facts of this case is not

appropriate and will not be determinative of the decision in the case pending in the District

Court. Accordingly, this Court should decline to answer the question presented.

This Court should decline to answer the certified question because there iscontrolling precedent in the decisions of this Court.

Ohio law is well settled that clear, unambiguous written contracts will be enforced in

accordance with the written contract terms. It is a basic principle of contract law that a clear and

unambiguous written contract will be enforced in accordance with its terms. "When the terms in

a contract are unambiguous, courts will not in effect create a new contract by finding an intent

not expressed in the clear language employed by the parties." Shifrin v. Forest City Enterprises,

64 Ohio St.3d 635, 637, 1992-Ohio-28, 5, 397 N.E.2d 499, 501: That is the basic purpose of a

written agreement; to set forth the express terms which will bind the parties in the future, so that

4

there is no misunderstanding as to intent or the nature of the agreement. "Where the parties

following negotiations make mutual promises which thereafter are integrated into an

unambiguous contract duly executed by them, courts will not give the contract a construction

other than that which the plain language of the contract provides." Aultman Hospital Assn. v.

Hospital Care Corp. (1989) 46 Ohio St.3d 51, 544 N.E.2d 920 at syllabus. "Where the terms are

clear and unambiguous, a court need not go beyond the plain language of the agreement to

determine the rights and obligations of the parties." In Re All Kelley & Ferraro Asbestos Cases,

104 Ohio St.3d 605, 2004-Ohio-7104, 821 N.E.2d 59, ¶29.

Insurance policies are contracts, and these general rules of contract construction apply to

their inteWre'tation as well. "An insurance policy is a contract whose interpretation is a matter of

law. ... Although ambiguous provisions in an insurance policy must be construed strictly against

the insurer and liberally in favor of the insured (citations omitted), it is equally well settled that a

court cannot create ambiguity in a contract where there is none." Lager v. Miller-Gonzalez, 120

Ohio St. 3d 47, 2008-Ohio-4838, 896 N.E.2d 666 at ¶15, 16.

The reasonable expectations doctrine is in direct conflict with these well settled principles

of contract construction. "[T]he reasonable expectation doctrine requires a court to rewrite an

insurance contract which does not meet popular expectations. Such rewriting is done regardless

of the bargain entered into by the parties to the contract. Such judicial activism has not been

adopted in Ohio by its courts." Park-Ohio Industries, Inc. v. The Home Indemnity Co. (1992),

975 F2d 1215, 1223.

The Ohio Supreme Court has considered the reasonable expectations doctrine twice in the

past ten years, in Andersen v. Highland House Co., 93 Ohio St.3d 547, 2001-Ohio-1607, 757

N.E.2d 329, and in Wallace v. Balint, 94 Ohio St.3d 182, 2002-Ohio-480, 761 N.E.2d 598. In

5

each of these cases, the controlling opinion notes that the Court has not accepted the reasonable

expectations doctrine.Z

Ohio Appellate Courts that have considered or reviewed the reasonable expectation

argument since this Court's decision in Wallace have expressed no confusion about the state of

the law. They have all recognized that Ohio law has not adopted the reasonable expectations

doctrine and that insurance policies, like other contracts, are enforced in accordance with their

terms. Tuthill Energy Sys. v. Employers Ins. of Wausau, 3`d Dist. No. 2-03-25, 2004-Ohio-1394,

at ¶13; I.G.H. II, Inc. v. Selective Ins. Co. of South Carolina, 6s' Dist. No. WD-06-058, 2007-

Ohio-2258, at ¶46; Cincinnati Ins. Co. v. CPS Holdings, Inc., Cuyahoga App. Nos. 85967 and

85969, 2006-Ohio-713. ("Because we have found that Gulf's policy specifically excludes

coverage for liabilities arising out of contract, and CPS and DAS concede this fact, there is no

basis to adopt the reasonable expectations doctrine.") Id at ¶47. And when this Court reviewed

the Cincinnati Ins. Co. v. CPS Holdings case, it did not even see fit to address the reasonable

expectations argument. Cincinnati Ins. Co. v. CPS Holdings, Inc., 115 Ohio St.3d 306, 2007-

Ohio-4917, 875 N.E.2d 31.

This Court should decline to answer the certified question because the reasonableexpectations doctrine is not appropriately applied to the facts of this case.

Even if this Court were to consider the reasonable expectations doctrine, the facts in this

case are distinguishable from Andersen and Wallace and do not support a finding by the District

Court that the reasonable expectation doctrine should make coverage available to HoneyBaked.

Indeed, the facts in Andersen and Wallace are substantially different from the facts in this case.

In Andersen, the policy that the court considered is a third party general liability insurance

z"[W]e make no determination of the reasonable-expectations doctrine", Andersen at p.551;"[T]here is not yet a majority on this court willing to accept the reasonable-expectations

doctrine." Wallace at p.189.

6

policy. This implicates concerns for ensuing compensation for injured plaintiffs. No such

concerns are implicated here. The policy at issue in this case is a first party all-risk property

policy.

Furthermore, the court in Andersen found that the policy in that case was ambiguous. In

this case, the District Court has already reviewed the policy and found that it is unambiguous and

clearly excludes coverage for the property damage claim that is being made by HoneyBaked.

Consequently, the District Court's determination that the Affiliated FM policy unambiguously

excludes coverage for HoneyBaked's claimed loss stands in sharp contrast to the analysis in

Andersen, which concluded that the exclusion in that case was ambiguous. Andersen, 93 Ohio

St.3d at 548, 757 N.E.2d at 331 ("[w]e hold today that ... the policy language in question does

not clearly, specifically, and unambiguously state that coverage for residential carbon monoxide

poisoningg is excluded.").

The lack of ambiguity in the Affiliated FM policy exclusion barring coverage in this

matter is further significant because many jurisdictions that apply the reasonable expectations

doctrine have done so only upon first determining that the policy language is ambiguous. See 1-

5 Jeffrey E. Thomas, Appleman on Insurance §§5.05 (2010) ("The conflation of reasonable

expectations and contra proferentem is the most common approach. It uses reasonable

expectations to construe ambiguous provision of insurance policies".)

In Wallace, this Court considered -- but did not employ -- the reasonable expectations

doctrine in the context of personal auto policies, which provided underinsured motorist coverage.

In the present case, HoneyBaked is a sophisticated commercial entity that was represented by an

insurance broker when it purchased the first party property insurance policy from Affiliated FM.

This is significant because the reasonable expectations doctrine, to the extent that it has been

7

adopted in various U.S. jurisdictions, is frequently a doctrine employed to protect the interests of

individual unsophisticated policyholders rather than large commercial enterprises, such as

HoneyBaked, represented by an insurance broker. E.g., Stephen J. Ware, Inc., A Critique of the

Reasonable Expectations Doctrine, 56 U.Chi.L.Rev. 1461, 1466 (1989) ("Almost all the

reasonable expectations cases involve ordinary consumers without a sophisticated understanding

of insurance.") Sophisticated businesses like HoneyBaked, particularly when they employ an

expert[s] insurance broker to negotiate on their behalf, should be bound by the plain,

unambiguous language in the contracts they select and agree to be bound by and cannot later

attempt to modify their contracts to obtain a benefit that was not part of their bargain. Plastech

Engineered Products, Inc. v. Cooper-Standard Automotive, Inc., No. 3:01 CV 7658, 2003 U.S.

Dist. LEXIS 19155 (N.D. OH 2003)(citing Wall v. Firelands Radiology, Inc., 106 Ohio App.3d

313, 327, 666 N.E.2d 235 (rule of contra proferentum does not apply when contracting parties,

represented by experienced drafters, engaged in extensive negotiations as to contractual terms)).

Because the District Court has already concluded that the Affiliated FM policy

unambiguously excludes coverage for HoneyBaked's loss, and because Honey Baked is a

sophisticated insured represented by an insurance broker, there is no need to go outside of the

four corners of the policy to "interpret" it, or to employ anything other than ordinary rules of

contract construction to give the plain terms of the policy their ordinary meaning. In other words,

application of the unambiguous terms of the insurance policy is all that is required to determine

coverage under the policy.

If the Court were to re-examine the reasonable expectations doctrine, it would make

sense to do it in a case that involved a third party liability policy, or a case involving an

individual, unsophisticated policyholder rather than a large commercial enterprise represented by

8

an insurance broker like this case. It would make sense to do it in the context of an ambiguous

policy provision rather than an unambiguous policy provision like the present case. In short, the

facts in this case do not lend themselves to a fair and thorough review of the doctrine, or a

situation that is likely to be repeated in the near future. This Court has long held that contracts

such as the one at issue here that are clear and unambiguous and involve sophisticated parties,

should be interpreted in accordance with their terms. There is nothing unclear or unsettled about

that law; there is no reason for the Court to revisit it now.

If the Court accepts the certified question presented, the question should bemodified.

If the Court decides to accept the certified question of state law in this case, the Court

should modify the question so that it includes additional, undisputed and significant facts. The

question that has been certified by the District Court states:

In light of the Supreme Court of Ohio's Opinion in Anderson (sic) v. Highland

House Co., 93 Ohio St.3d 547 (2001), does the reasonable-expectations doctrineapply to a commercial general liability "all risk" insurance policy, so thatcoverage, which otherwise would be excluded under the terms and conditions ofthe policy, is afforded, provided the trier of fact determines that the insuredreasonably expected, when purchasing the policy, that the policy would cover theloss at issue.

However, the policy at issue in this case is not a general liability insurance policy like the

policy at issue in Andersen v. Highland House. Rather, it is a first party all-risk property

insurance policy. In Andersen the court was interpreting a policy which indemnified an insured

for its liability to claimants. In the present case, HoneyBaked is seeking coverage under a

property insurance policy for damage to its food product(s). It would be impractical for the

Court to try and determine rules of construction for a liability insurance policy in the context of

this case, which does not concern such a policy.

9

Furthermore, the fact that HoneyBaked is a sophisticated commercial enterprise, and that

it employed its own insurance broker to procure and negotiate the terms of the policy, and the

fact that the District Court has already determined the clear and unambiguous policy language

excludes coverage for HoneyBaked's claim, are important factors which distinguish this case

from the type of case where the insured is an unsophisticated individual, or the terms of the

policy are ambiguous and susceptible to more than one meaning.

For these reasons, Respondent, Affiliated FM respectfully requests that if the Court

decides to accept the certified question, that it modify the question to incorporate these important

factors. In that instance, the proposed question that Affiliated FM would submit to the Court for

consideration is as follows:

Where a court finds that a property insurance policy unambiguously excludes theloss at issue, can a sophisticated insured, represented by an insurance broker,invoke the reasonable expectations doctrine to permit the finder of fact toconclude that insurance coverage nevertheless exists based on a claim that theinsured reasonably and objectively expected, at the time that the insuredpurchased the policy, the loss at issue would be covered by the policy?

CONCLUSION

For all of the above reasons, Respondent Affiliated FM Insurance Company respectfully

requests that this Court decline to accept the certified question for review because there is no

uncertainty under Ohio law as to the applicable principles of law and because application of the

reasonable expectations doctrine will not be determinative of the decision in the case pending in

the District Court. It is well settled under Ohio law in numerous decisions from this Court that

clear and unambiguous language in an insurance policy is to be enforced as written.

Furthermore, the facts in this case involve a first party property insurance policy, not a third

party liability insurance policy; unambiguous policy language, not an ambiguity; and a

10

sophisticated commercial enterprise represented by an insurance broker, not an individual,

unsophisticated policyholder.

Altematively, Affiliated FM respectfully requests that this Court modify the question, to

more accurately reflect the facts in this case, which the Court might properly consider.

Respey,&qlly

DAVID J.^GhdkLLI (0032930)(Counsel record)RICHARD M. GARNER (0061734)DAVIS & YOUNG1200 Fifth Third Center600 Superior Avenue, EastCleveland, OH 44114-2654(216) 348-1700; fax (216) 621-0602dfagtullgdavisyounQ.comrgarner(a davis ^ oun^.com

Thomas S. Brown (PHV 1326-2011)(pro hac vice motion pending)Jennifer L. Seme (0080365)Gibbons P.C.1700 Two Logan Square18"and Arch StreetsPhiladelphia, PA 19103215-665-0400tbrownna,gibonslaw.comj semegeibbonslaw. com

Attorneys for Defendant, AffiliatedFM Insurance Company

11

CERTIFICATE OF SERVICE

A copy of the foregoing was mailed this day of March, 2011 by regular U.S. Mail to

the following:

Alan G. StarkoffJeremy M. Grayem

Amanda L. WicklineSchottenstein, Zox & Dunn Co., L.P.A.

250 West StreetColumbus, OH 43215-2538

Attorneys for Plaintiff/Petitioner HoneyBaked Food

DAVID J. F/AGhYILLI ( 0032930)

12

Case: 3:08-cv-01686-JGC Doc #: 54 Filed: 12/02/10 1 of 23. PagelD #: 1987

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF OHIO

WESTERN DIVISION

HoneyBaked Foods, Inc., Case No. 3:08CV01686

Plaintiff

V.

Affiliated FM Insurance Company,

Defendant

ORDER

This is an insurance coverage case. Following the discovery of a pathogenic bacterium in

several production runs of its ham and turkey products, plaintiff HoneyBaked Foods, Inc., claimed

a loss of about $8 million under its "all-risk" policy with defendant Affiliated FM Insurance

Company. Affiliated FM denied the claim, asserting that exclusions under the policy leave

HoneyBaked without coverage for any part of the loss. HoneyBaked filed a complaint seeking a

declaratory judgment of its rights under the policy, and alleging breach of contract and bad faith.

Jurisdiction is proper under 28 U.S.C. § 1332.

Pending are counter-motions for summary judgment on the declaratoryjudgment and breach

of contract claims. [Docs. 35, 411. For the following reasons, the defendant's motion is granted in

part, and the parties are directed to propose a question or questions for certification to the Ohio

Supreme Court regarding whether, notwithstanding the failure of the policy at issue otherwise to


cover the plaintiff s loss, such loss might be covered,.contingent onjury findings of disputed facts,

under Ohio law.

Background

1. HoneyBaked's Operations

HoneyBaked is a meat and poultry processor that processes cooked spiral sliced hams and

turkey breasts at a facility in Holland, Ohio. As of November, 2006, HoneyBaked processed the

cooked hams and turkeys from its suppliers by unpacking them, applying a glaze and then

repackaging and freezing them for shipment to customers. The processing operations included a

conveyor system equipped with hollow rollers to transport food products within the facility.

HoneyBaked is subject to routine inspection by the Food Safety and Inspection Service

(FSIS), part of the United States Department of Agriculture (USDA).

2. Discovery of Listeria Monocytogenesand Resulting Claims

In earlyNovember 2006, the FSIS informed HoneyBaked that a sample from HoneyBaked's

October 30, 2006, production ran' had tested positive for listeria monocytogenes (lister4a). Listeria

is a pathogenic bacterium that causes listeriosis, an uncommon but potentially fatal disease.

HoneyBaked hired Silliker Laboratories to test samples from the surrounding production dates.

When HoneyBaked learned that surrounding production runs tested presumptively positive for

listeria as well, it suspended its operations.

'A production run is the amount of product processed in one day or from clean-up to clean-up. The size of a lot can vary from day to day.

2

Case: 3:08-cv-01686-JGC Doc #: 54 Filed: 12l02/10 3 of 23. PagelD #: 1989

HoneyBaked also notified FSIS that some product from these production runs had already

been introduced into commerce and purchased by consumers. FSIS concluded that a recall was not

necessary at this point.

HoneyBaked worked with Dr. Joseph Cordray of Iowa State University to investigate how

the listeria came into contact with the food products. Dr. Cordray and others identified the hollow

roller of the conveyor system as the likely source of listeria. Further inspection revealed a sludge-

like substance in the hollow roller. This substance tested positive for listeria. Ribo-typingZ confirmed

that the listeria discovered in the hollow roller matched the listeria found on the food products.

HoneyBaked immediately ceased use of the conveyer system and removed it from the

facility. HoiieyBaked also engaged in extensive cleaning and sampling procedures. After reviewing

its policies and procedures, HoneyBaked resumed production.

On November 17, 2006, HoneyBaked pulled samples from production dates ranging from

September 11, 2006 through October 17, 2006 to be tested by Silliker Laboratories. One turkey

product and ninety-three ham products tested positive for listeria. Honeybaked began a voluntary

recall of the 46,941 pounds of fully cooked ham and turkey products produced between

September 5, 2006 and November 6, 2006 that had been introduced into commerce.

The FSIS issued a notice of ineffective recall, and HoneyBaked suspended producrion again

on November 29, 2006. HoneyBaked resumed production on December 9, 2006.

Ultimately, HoneyBaked recovered only 5,674 pounds of product. An additional 989,207

pounds of product remained segregated in HoneyBaked's freezers.

2 Ribo-typing determines whether two strains of a bacteria are identical.

3

Case: 3:08-cv-01686-JGC Doc #: 54 Filed: 12102l10 4 of 23. PagelD #: 1990

In early August, 2007, HoneyBaked informed Affiliated FM that it planned to dispose of the

nearly one million pounds of remaining product from the affected production runs. Soon after,

HoneyBaked deposited the product in a local landfill, retaining one sample from each production

date for fnrther testing if necessary.

In November 2006, during the listeria investigation, HoneyBaked provided notice of its

potential claim to Affiliated FM. HoneyBaked eventually submitted an insurance claim to Affiliated

FM seeking reimbursement for the value of the disposed food products and additional losses

resulting from the business interrnptions.

3. The Al1-Risk Policy

HoneyBaked had purchased an all-risk insurance policy from Affiliated FM covering the

period of April 1, 2006 through April 1, 2007. There is no dispute that HoneyBaked paid all required

premiums and that the policy was in effect at the time HoneyBaked discovered the listeria in its

production runs.

The policy insures against direct physical loss or damage to real property and personal

property and provides recovery for damages sustained during periods of business interrnption,

except where excluded. Specifically, the policy states:

A. PERILS INSURED

This policy insures against all risks of direct physical loss or damageto insured property except as excluded under this policy.

[Doc. 35-14, at 11].

The policy sets forth two groups of exclusions:

F. PERILS EXCLUDED

4


GROUP I. This policy does not insure against the loss or damage causeddirectly or indirectly by or resulting from any of the following. Loss ordamage is excluded regardless of any other cause or event whether or notinsured under this policy that contributes concurrently or in any sequence to

the damage.

11. Fungus, mold or mildew, except as provided in Section D.,

Extensions of Coverage, Item 18.

GROUP II. This policy does not insure against loss or damages caused by thefollowing; however, if direct physical loss or damage insured by this policyresults, then that resulting direct physical loss or damage is covered.

1. Defects in materials, faulty workmanship, faulty construction or

faulty design.

2. Loss or damage to stock ormaterials attributable to.manufacturingor processing operations while such stock or materials are beingprocessed, manufactured, tested, or otherwise being worked upon.

5. Contamination, including but not limited to pollution.

[Doc. 35-14, at 25-27].

Item 18 under "Extensions of Coverage" provides specific coverage for fungus, mold and

mildew:

This policy is extended to cover the direct physical loss or damage to insuredproperty caused by or resulting from fangus, mold or mildew, when fungus, mold ormildew is the direct result of direct physical loss or damage insured by this policy.This coverage includes any costs or expense to clean up, remove, contain, treat,detoxify or neutralize fangus, mold or mildew from insured property resulting from

such loss or damage.

[Doc. 35-14, at 21].

5


The policy defines the phrase "fungus, mold or mildew" as "fuagus, including butnot limited

to, mildew and mold; protist; wet rot; dry rot; or bacterium; or chemical matter or compounds

produced or released by such fangus, protist, wet rot, dry rot, or bacterium." [Doc. 35-14, at 38].

The policy also contains a separate endorsement for business interruption coverage, which

states:

1. COVERAGE PROVIDED:

In consideration of additional premium, this policy is extended to cover theactual loss sustained by the Insured due to the necessary interruption ofproduction or business operations or services during the period ofinterruption of the following:

A. Gross Earnings, Rents, and Expenses to Reduce Loss; and

B. Extra Expense;

Directly resulting from direct physical loss or damage, of the type insured bythis policy to property not otherwise excluded, utilized by the insured, andat a location, but only to the extent the Insured is able to make up productionand resume or continue operafions or services, partially or entirely, byutilizing damaged or undamaged property all whether or not at a location(s).

[Doc. 35-14, at 41].

4. Denial of Claim and Resulting Litigation

On February 20, 2008, Affiliated FM informed HoneyBaked that it would not cover any part

of HoneyBaked's claim. In a March 4, 20081etter, Affiliated FM explained that presence of listeria

itself was not a physical loss or damage, and that it denied coverage for the product loss based on

exclusions in the policy. Affiliated FM explained that it denied coverage of the business interruption

losses, stating that because "there is no covered physical loss or damage, any business interruption

associated with the listeria contaminated product . . . is also not covered." [Doc. 41, at 20].

6

Case: 3:08-cv-01686-JGC Doc#: 54 Filed: 12/02/10 7 of 23. PagelD #: 1993

Following the denial ofits claims underthe policy, HoneyBaked sued Affiliated FM, seeking

declaratoryjudgment of its rights under the policy and alleging that Affiliated FM had breached the

contract and acted in bad faith in denying the claim. Affiliated FM filed a motion for partial

summary judgment on the declaratory judgment and breach of contract claims, and HoneyBaked

answered with a counter-motion for partial summary judgment on the same claims.

Standard of Review

A party is entitled to summary judgment on motion under Fed. R. Civ. P. 56 where the

opposing party fails to show the existence of an essential element for which that party bears the

burden of proof. Celotex Corp. v. Cartrett, 477 U.S. 317, 322 (1986). The movant must initially

show the absence of a genuine issue of material fact. Id. at 323.

Once the movant meets that initial burden, the "burden shifts to the nonmoving party [to] set

forth specific facts showing there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 250 (1986) (quoting Fed. R. Civ. P. 56(e)). Rule 56(e) "requires the nonmoving party to

go beyond the [unverified] pleadings" and submit admissible evidence supporting its position.

Celotex, supra, 477 U.S. at 324.

In deciding a motion for summary judgment, I accept the opponent's evidence as ttue and

construe all evidence in the opponent's favor. Eastman Kodak Co. v. Image Tech. Servs., Inc., 504

U.S. 451, 456 (1992). The movant can prevail only if the materials offered in support of the motion

show there is no genuine issue of a material fact. Celotex, supra, 477 U.S. at 323.

Discussion

As Judge Rakoff of the Southern District of New York observed, "It seems that even if one

insures against àll risks,' one cannot insure against a lawsuit." Allianz Ins. Co. v. RJR Nabisco

7


Holdings Corp., 96 F. Supp. 2d 253, 254 (S.D.N.Y. 1999). HoneyBaked initiated this lawsuit after

Affiliated FM denied its claims under the all-risk insurance policy. Affiliate FM argues that the

policy excludes the loss claimed by HoneyBaked and thus there was no breach of contract.

HoneyBaked counters that it is entitled to summaryjudgment on both the declaratory judgment and

breach of contract claims because: 1) the policy covers the loss; 2) the Group II exclusions are

ambiguous; and 3) HoneyBaked had a reasonable expectation of coverage.

The party seeking to recover under an insurance policy generally bears the burden of

demonstrating coverage under the policy as well as proving a loss. See Chicago Title Ins. Co. v.

Huntington Nat'l Bank, 87 Ohio St. 3d 270, 273 (1999). When an insurer denies liability coverage

based on a policy exclusion, the insurer bears the burden of demonstrating its applicability. See

Continental Ins. Co. v. Louis Marx & Co., 64 Ohio St. 2d 399, 402 ( 1980). "In order to defeat

coverage, the insurer must establish not merely that the policy is capable of the construction it

favors, but rather that such an interpretation is the only one that can fairly be placed on the language

in question." Anderson v. Highland House Co., 93 Ohio St. 3d 547, 549 (2001).

Standard rules of contract interpretation apply when construing insurance policies.' St.

Mary's Foundry v. Employers Ins. of Wausau, 332 F.3d 989, 992 (6th Cir. 2003) (applying Ohio

law). Construing a written policy, therefore, is a matter of law for the court. See Alexander v.

Buckeye Pipe Line Co., 53 Ohio St. 2d 241, 245-46 (1978).

The primary goal of contract constraction is to give effect to the intentions ofthe contracting

parties. Kelly v. Med. Life Ins. Co., 31 Ohio St. 3d 130, 132 (1987). I give words and phrases their

3A federal court exercising diversity jurisdiction applies the choice of law rules of the statein which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Here, the partiesdo not dispute the application of Ohio law.

8


ordinary meaning unless another meaning is apparent from the contents of the policy. Westj7eld Ins.

Co. v. Galatis, 100 Ohio St. 3d 216, 219 (2003) (citing Alexander, supra, 53 Ohio St. 2d at 241).

Where a contract is clear and unambiguous, the plain language of the contract determines the

parties' rights and obligations. ThorWorks Industries v. E.I. DuPont De Nemours and Co., 606 F.

Supp. 2d 691, 696 (N.D. Ohio 2008).

If insurance contract provisions are reasonably susceptible to more than one interpretation,

I must construe them "strictly against the insurer and liberally in favor of the insured." King v.

Nationwide Ins. Co., 35 Ohio St. 3d 208, 211 (1988); see Yeager v. Pacific Mut. Life Ins. Co., 166

Ohio St. 71 (1956) ("It is axiomatic that an insurance policy prepared by the insurer must be

liberally construed in favor of the insured. Any ambiguity must be resolved against the insurer.").

Nevertheless, this rule of constraction should not be applied to force an unreasonable interpretation

of the words of the policy. Morfoot v. Stake, 174 Ohio St. 506, 508 (1963).

HoneyBaked asserts, and Affiliated FM does not deny, that the policy covers its ham and

turkey products, and that the nearly one million pounds ofproduct it disposed of constituted a loss.

Affiliated FM argues that the policy's "Group II" exclusions preclude coverage of this loss.

HoneyBaked challenges the exclusion, and additionally claims that policy's "Fungus, Mold or

Mildew" extension of coverage applies to the loss. HoneyBaked argues that even if the policy

excludes its product loss, it is nevertheless entitled to recover for its business interruptions.

1. Group II Exclusions

Affiliated FM denied HoneyBaked's claim, citing three of the policy's Group II exclusions.

Affiliated FM's motion for partial summary judgment addresses only the manufacturing and

processing operations exclusion and the contamination exclusion.

9

Case: 3:08-cv-01686-,]GC Doc #: 54 Filed: 12/02/10 10 of 23. PagelD #: 1996

HoneyBaked argues that the Group II exclusions are at the very least confusing, ambiguous

and susceptible to more than one interpretation. HoneyBaked also contends that the exclusions cited

by Affiliated FM are inapplicable to the loss caused by the listeria.

A. Ambiguity

The policy excludes two groups of perils. The parties agree that the Group I exclusions are

absolute. Regarding Group II exclusion, the policy states:

This policy does not insure against loss or damages caused by the following;however, if direct physical loss or damage insured by this policy results, then thatresulting direct physical loss or damage is covered.

At the heart ofHoneyBaked's argument is the qualifying language, "however if direct physical loss

or damage insured by this policy results, then that resulting direct physical loss or damage is

covered."

HoneyBaked asserts that this wording "provides that resulting `physical loss or damage

insured by the policy' will be covered" - in effect, that the wording "eliminates the exclusion and

reinstates the general coverage provision of the policy." [Doc. 41, at 28]. But this is not a reasonable

interpretation of the language.

"Resulting" physical loss or damage is by definition not the same excluded physical loss or

damage. It is damage emanating from a cause otherwise insured by the policy but which ultimately

results from an excluded cause. Damage "insured by the policy" is, in an all-risk policy, damage

that is not excluded by the policy.

The language does not reinstate the general coverage provision for excluded causes, but

rather reaffinns coverage for secondary losses which were ultimately caused by an excluded event.

The language is awkward, but it is not indecipherable, nor does it create a nullity.

10

Case: 3:08-cv-01686-JGC Doe #: 54 Filed: 12/02/10 11 of 23. PagelD #: 1997

Applying the above insights, the exclusion reads:

This policy does not insure against loss or damages caused by [e.g., contamination];however, if direct physical loss or damage [not excluded by] this policy results [fromthat contamination], then that resulting direct physical loss or damage is covered.

The law commonly refers to such qualifying language as an "ensuing loss" clause. See

Kappa Ethanol, LLC v. Affiliated FMIns. Co., 2008 WL 4790997, *4 (D. Neb.) (construing nearly

identical language as ensuing loss clause).

An ensuing loss provision is a"causation-in-fact-brealdng link in coverage exclusions,"

establishing that independent losses caused by an excluded event are covered. TMWEnters. v. Fed.

Ins. Co., 619 F.3d 574, 578-79 (6th Cir. 2010)°; see Blaine Const. Corp. v. Ins. Co. of North

America, 171 F.3d 343, 349 (6th Cir. 1999) (applying Tennessee law) (fmding ensuing loss clause

reinstated coverage for water damage resulting from excluded faulty construction). Cf. P-udential

Prop. & Cas. Ins. Co. v. Lillard-Roberts, 2002 WL 31495830, * 19 (D. Or.) ( "[T]he ènsuing loss'

clause [applies] in those rare cases where reasonable damage expected to be caused by faulty

workmanship leads to another peril that causes damage beyond that normally expected.");

Montefiore Med. Ctr. v. Am. Prot. Ins. Co., 226 F. Supp. 2d 470,479 (S.D.N.Y. 2002) ( "An ensuing

loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other

property wholly separately from the defective property itself.").

^ The Sixth Circuit also recognized that such a provision could also be interpreted as aredundancy that simply reminds the reader that what is not excluded is covered. Id. at 577-78. "Justas all light switches contain an òn' and òff designation, so it is useful to spell out when coverageapplies and does not apply." Id. The court was less persuaded by this reading, but found itunnecessary to decide between interpretations because, as is the case here, the insured could claimcoverage under neither interpretation.

11


Even if I were to accept that the language is susceptible to two constructions - one which

renders all Group II exclusions a nullity, and one which reinstates coverage for certain unforeseeable

losses notwithstanding the exclusions - Ohio law directs courts to give rational construction to

contracts and avoid inequitable, unusual, or unreasonable constructions. Export-Import Bank of the

United States v. Advanced Polymer Sciences., Inc., 624 F. Supp. 2d 696, 704 (N.D. Ohio 2009)

(citing Graham v. Drydock Coal Co., 76 Ohio St. 3d 311, 316 (Ohio 1996)). It is unreasonable to

construe the language as eliminating the seven exclusions directly following it when an alternative,

recognized and reasonable interpretation exists.

The qualifying language in the Group II exclusions constitutes an ensuing loss provision. It

neither reinstates the general coverage provision nor is so confusing or ambiguous as to require an

interpretation in favor of coverage.s

B. Manufacturing and Processing Operations Exclusion

Affiliated FM asserts that manufacturing and processing operations exclusion precludes

coverage. The policy states:

GROUP II. This policy does not insure against loss or damages caused by thefollowing; however, if direct physical loss or damage insured by this policy results,then that resulting direct physical loss or damage is covered.

2. Loss or damage to stock or materials attributable to manufacturing orprocessing operations while such stock or materials are being processed,manufactured, tested, or otherwise being worked upon.

Incorporating the language results in the somewhat baffling reading: "This policy does not

insure against loss or damages caused by loss or damage to stock or materials attributable to

5 HoneyBaked does not assert coverage of the ham and turkeys under the ensuing lossprovision.

12


manufacturing or processing operations while such stock or materials are being processed,

manufactured, tested, or otherwise being worked upon."

HoneyBaked asserts that the exclusion is nonsensical. In the alternative, HoneyBaked argues

that it is at least open to multiple interpretations. Relying on the annotation to a similar exclusion

in an FM Global property damage policy, HoneyBaked suggests that the policy can be read as

excluding coverage for damage attributable to the introduction of a wrong ingredient, a faulty

ingredient, or a quantity not in accord with the product formula. HoneyBaked also believes the

policy can be read as excluding damage attributable to normal manufacturing or processing

operations. As listeria is not an ingredient or any part of HoneyBaked's normal operations,

HoneyBaked contends its claim is not precluded by this exclusion.

Affiliated FM rejects these interpretations, claiming the repetition of "loss or damage" does

not render the exclusion meaningless and that the annotation is completely irrelevant to determining

the intent of the exclusions in this policy.

I find that regardless ofthe origin of HoneyBaked's reading of the exclusion, the reading is

a reasonable one. The exclusion is thus at best ambiguous. Because ambiguity must be resolved in

favor of the insured, this exclusion does not preclude HoneyBaked's claim.

C. Contamination Exclusion

Affiliated FM relies on the contamination exclusion to preclude HoneyBaked's claim. The

contamination exclusion of the policy reads:

This policy does not insure against loss or damages caused by [contamination,including but not fimited to pollution]; however, if direct physical loss or damageinsured by this policy results, then that resulting direct physical loss or damage iscovered.

[Doc. 35-14, at 25-27].

13


Affiliated FM asserts that the plain and ordinary meaning of contamination includes the

listeria discovered on HoneyBaked's products.

The contract defines "pollution" as including bacteria. The Ohio Court ofAppeals has found

that the "usual and ordinary meaning" of °contaminate" is "to render unfit for use by the

introduction of unwholesome or undesirable elements." Hartory v. State Auto. Mut. Ins. Co., 50

Ohio App. 3d 1, 3(1988) (citing Webster's ThirdNew Intemational Dictionary (1981) 491); see also

Richland YalleyProds., Inc. v. St. Paul Fire & Cas. Co., 548 N.W.2d 127, 131 (Wis. App. Ct. 1996)

(collecting cases uniformly construing the term "contamination").

The presence of listeria on HoneyBaked's food products plainly renders the products unfit

for consumption, and as such meets the ordinary, unambiguous definition of "contamination." See

LandshireFastFoods ofMilwaukee, Inc. v. EmployersMutual Cas. Co., 676N.W.2d 528, 532 (Wis.

App. Ct. 2003) (interpreting "contamination" to incorporate listeria monocytogenes in food

products).

HoneyBaked does not directly challenge that contamination includes listeria. Rather,

HoneyBaked argues that the exclusion does not apply because it distinguishes between damage

caused by contamination and contamination damage. In the altemative, HoneyBaked believes that

its claim is subject to an exception to the exclusion. Finally, HoneyBaked argues that regardless of

whether the contamination exclusion precludes its claim, it reasonably expected that the policy

would cover such losses and cannot therefore be denied coverage.

i. "Damage Caused By Contamination" vs "Contamination Damage"

Some courts have held that where mold or contamination losses result from an event covered

by an insurance policy, these losses are covered under policies excluding losses "caused by" mold

14


or contamination. E.g., Liristis v. Am. Family Mut. Ins. Co., 61 P.3d 22, 25 (Ariz. App. Ct. 2002)

("[M]old damage caused by a covered event is covered ... . On the other hand, losses caused

by mold may be excluded."); Simonetti v. Selective Ins. Co., 859 A.2d 694, 699 (N.J. 2004) (mold

damage covered despite policy exclusion for "loss caused by mold" where plaintiff could prove

mold resulted from rainstorm, a covered peril); Graff v. Allstate Ins. Co., 54 P.3d 1266, 1268-69

(Wash. App. Ct. 2002) (contamination exclusion did not bar coverage where vandalism, a covered

peril, resulted in the contamination).

Affiliated FM does not dispute HoneyBaked's conclusion that the hollow roller in the

conveyor system harbored and spread the listeria. HoneyBaked claims that "[i]f the hollow roller

was the sole cause of the contamination in the first instance, then the hollow roller caused the loss,

not contaminarion."-[Doc. 41, at 31 ]. But the hollow roller did not damage HoneyBaked's products.

The listeria, deposited on the hams and turkeys from the sludge in the hollow roller, caused the loss.6

Thus, the only preceding cause of the contamination loss was contamination. Because the policy

expressly excludes contamination, the contamination ofthe hollow roller is not a covered event, and

the resulting contamination is likewise not covered.

6 Affiliated FM does not dispute that the hollow roller created the harborage site for thelisteria in the facility. But even if I were to accept that the hollow roller, rather than the listeria itharbored, caused the contamination, HoneyBaked has not alleged that it is a covered event, and haspresented nothing to create a genuine issue of material fact that it would be a covered event.

In fact, Group II exclusions include "design flaws" and "manufacturing and processingoperarions" [Doc. 35-14, at 26]. A design flaw seems apparent where a hollow roller capable ofharboring dangerous bacteria and transferring it onto food products is incorporated into a foodproduct assembly line. The hollow roller was indisputably part of the manufacturing and processingoperations. Affiliated FM asserted both of these exclusions when it denied HoneyBaked's claim.

15


HoneyBaked has ar6culated nothing to demonstrate that there is a genuine issue of material

fact as to the causation of the contamination, and has not asserted that a covered event caused the

listeria contamination.

ii. The Exception to the Exclusion

HoneyBaked also relies on the exception to the exclusion to argue thatpolicy covers the loss.

The exclusion provision, as stated above, includes the following exception: "however, if direct

physical loss or damage insured by this policy results, then that resulting physical loss or damage

is covered." HoneyBaked claims that the contamination of the ham and turkey products is a

"resulting physical loss or damage" covered by the exception to the exclusion.

HoneyBaked asserts that the Tenth Circuit decision in Leprino Foods Company v. Factory

Mutual Insurance Company, 453 F.3d 1281 (10th Cir. 2006), supports this interpretation. But I find

the case distinguishable.

In Leprino, the insured, a cheese manufacturer, sought coverage under an all-risk policy

purchased from Factory Mutual Insurance Company (FM). Id. at 1283. The policy contained a

"contamination exclusion" which provided:

This Policy excludes the following unless directly resulting from other physicaldamage not excluded by this Policy:

1) contamination including but not limited to the presence of pollution or hazardousmaterial.

After receiving complaints of an off-flavor in its cheese, Leprino discovered that fruit juice

concentrate had spilled in one of its warehouses, leading to the contamination of over eight million

pounds of cheese. Id. at 1284. Leprino detelmined the cheese was not usable even as salvage for

16


feed to animals, and disposed of it in a landfill. Id. Leprino claimed the loss under its all-risk

insurance policy, and FM denied the claim. Id. Leprino sued for breach of contract, and, after a trial

focused on expectations of coverage, the jury retumed a verdict in favor of FM. Id. at 1286.

On appeal, Leprino argued that the damages it sustained stemmed from "other physical

damages" as set forth in the exception to the contamination exclusion. Id. The Tenth Circuit agreed

that there was a genuine issue of material fact as to the cause of the damaged cheese and remanded

the case for a new trial on the issue of the cause of the contamination. Id.

HoneyBaked argues that the contamination exclusions inLeprino are closely related to those

in the present case because both include the "resulting loss" language. I disagree.

The policy inLeprino "excludes [contamination] unless directly resulting from otherphysical

damage not excluded by this Policy." HoneyBaked's policy states:

This policy does not insure against loss or damages caused by [contamination,including but not limited to pollution]; however, if direct physical loss or damageinsured by this policy results, then that resulting direct physical loss or damage iscovered.

While both policies include the word "resulting,"the similarity ends there. "Resulting from

other physical damage" cannot be analogized to "resulting direct physical loss or damage." The

former refers to the root cause of a condition, the latter to a condition's effects.'

Even ifHoneyBaked's policy could somehow be interpreted as the temporal opposite ofwhat

it states, the Leprino decision does not mandate coverage. Rather, as the court stated, "the only

'As discussed above, the exception or carve-out HoneyBaked relies on is recognized as an"ensuing loss" provision, which applies to cover events resulting from an excluded event whichwould, but for their origin in the excluded event, have been covered by the policy. To the extenttherecan be polar opposites in the convoluted language ofinsurance policies, these policies manifestsuch opposites.

17


reasonable reading of this language is that contamination losses resulting from perils otherwise

covered by the policy are likewise covered and contamination losses resulting from perils expressly

excluded by the policy are like-wise excluded." Leprino, supra, 453 F.3d at 1289 (quoting Allianz,

supra, 96 F. Supp. 2d at 255). As discussed above, HoneyBaked has demonstrated neither a factual

dispute as to the cause of the contamination nor that contamination resulted from a covered cause.

iii. Reasonable Expectation of Coverage

HoneyBaked argues that it had no indication that the policy it purchased from Affiliated FM

would not insure against listeria. While conceding that Ohio has not adopted the reasonable-

expectations doctrine, HoneyBaked asserts that the Supreme Court of Ohio's decision in Anderson

v. Highland House Co., 93 Ohio St. 3d 547 (2001), "applied the doctrine in theory." [Doc. 52, at 3].

HoneyBaked asserts that its claim is comparable to that considered in Anderson, and that therefore

I should fmd that the policy covers its loss.

InAnderson, the Supreme Court of Ohio considered whether carbon monoxide qualified as

a"pollutant" such that the pollution exclusion in the policy precluded coverage for death and

injuries,resulting from residential carbon monoxide poisoning. The pollution exclusion inthepolicy

stated that there was no coverage for "bodily injury or property damage arising out of the actual,

alleged or threatened discharge; dispersal, seepage, migration, release or escape of pollutants

Id. at 547. The policy defined "pollutants" as "any solid, liquid, gaseous or thermal irritant or

contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." Id. at 548.

The Supreme Court of Ohio found that "the policy in question never clearly excludes claims

for deaths or injuries caused by residential carbon monoxide poisoning." Id. at 549. The court held

that "it is not the responsibility of the insured to guess whether certain occurrences will or will not

18


be covered based on nonspecific and general words or phrases that could be construed in a variety

of ways." Id.

The court thus found that, based on the history and original purposes for the pollution

exclusion, it was reasonable for the insured to believe that the policy would not exclude claims for

injuries due to carbon monoxide poisoning. Id. at 549-50. Given this history and the general,

nonspecific language of the exclusion, the court found the exclusion ambiguous and held against the

insurer. Id.

HoneyBaked argues that, like the policy in Anderson, the all-risk policy here does not

specifically exclude losses involving listeria, and therefore it was reasonable for it to assume that

the policy would cover such losses. HoneyBaked argues that Affiliated FM was•aware Ctiat losses

from damage to food products was a major concern of HoneyBaked, and therefore the policy should

cover the loss.

The decision in Anderson does not squarely fit this case. In Anderson, the Supreme Court

of Ohio. noted that the history of the pollution exclusion suggested that. the policy did not

contemplate carbon monoxide. HoneyBaked points to no similar history of the contamination

Moreover, the fact that the policy failed to specify a particular bacterial contaminant cannot

result in the exclusion being void. Requiring an insurer to list every possible species of bacteria that

could contaminate a food product is neither rational nor necessary to defining and implementing an

exclusion.

19


Nonetheless, the decision in Anderson could support the reasonable-expectations doctrine.

The Ohio Supreme Court admitted as much, stating, "while we make no deterntination on the merits

of the reasonable-expectations doctrine, this rationale could apply to the case at bar." Id. at 551.

The Supreme Court of Ohio considered the reasonable expectations doctrine in Wallace v.

Balint, 94 Ohio St. 3d 182,189 (2002). The court observed that the Second Restatement of Contracts

explains the doctrine, providing:

Where the other party has reason to believe that the party manifesting such assentwould not do so if he knew the writing contained a particular term, the term is notpart of the agreement.

Id.; 2 Restatement of Law 2d, Contracts (1981) § 211(3).

The court also quoted Professor Keeton's description of the doctrine's application to

insurance, policies: "The objectively reasonable expectations of applicants and beneficiaries

regarding the terms of insurance contracts will be honored even though painstaking study of the

policy provisions would have negated those expectations." Id. (quoting Keeton, Insurance Law

Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970).

Although finding the arguments for applying the reasonable-expectations doctrine

compelling, the court observed in Anderson that "there is not yet a majority on this court willing to

accept the reasonable-expectations doctrine." 94 Ohio St. 3d at 189.

Lower Ohio courts, looking to Anderson, have considered arguments based on the

reasonable-expectations doctrine. LG.II II, Inc. v. Selective Ins. Co. ofSouth Carolina, 2007 WL

1378379, *5 (Ohio App. Ct.) (finding insured had no reasonable expectation of coverage); Buckeye

Rancl2, Inc. v. Northfield Ins. Co., 134 Ohio Misc. 2d 10, ¶¶ 38-43 (Ohio Com. Pl. 2005) (finding

20


the Ohio Supreme Court's "pragmatic approach ... to understanding what parties thought they

would receive when buying insurance" similar to the reasonable-expectations doctrine).

While a close reading of the policy excludes the loss of HoneyBaked's food products caused

by listeria, a jury could find that HoneyBaked reasonably believed its all-risk policy.covered its

biggest risk - spoilation during processing of its product. The record indicates that HoneyBaked

believed the policy covered this type of loss, and this belief, ajury could find, was not unreasonable.

Because a jury could find that HoneyBaked had a reasonable expectation of coverage, and

because the policy unambiguously excludes losses caused by contamination, the availability of

coverage, notwithstanding the exclusion, turns on the question of whether the Ohio law will

recognize the reasonable-expectations doctrine.

The best source for learning the definitive answerto this question is the Ohio Supreme Court.

The best way to get the answer is to certify the question to that court. I conclude, accordingly, that,

subject to further discussion with counsel for the parties, I should, and I anticipate that I shall, certify

the appropriately framed question to the Ohio Supreme Court.

2. The Fungus, Mold or Mildew Provision

HoneyBaked argues that even if the general coverage provisions do not apply, its loss must

still be covered under the policy's Fungus, Mold or Mildew provision.

The policy expressly excludes all coverage for "fungus, mold or mildew, except as provided

in Section D. Extensions of Coverage, Item 18." [Doc. 35-14, at 27]. Item 18 under "Extensions of

Coverage," provides:

This policy is extended to cover the direct physical loss or damage to insuredproperty caused by or resulting from fungus, mold or mildew, when fungus, mold ormildew is the direct result of direct physical loss or damage insured by this policy.This coverage includes any costs or expense to clean up, remove, contain, treat,

21


detoxify or neutralize fungus, mold or mildew from insured property resulting fromsuch loss or damage.

[Doc. 35-14, at 21].

The definition of "fungus, mold or mildew" includes bacteria. Id. at 38.

HoneyBaked relies on the fact that bacteria, including the listeria which contaminated its

ham and turkey products, is included in the definition of "fungus, mold or mildew" in its claim for

coverage. But HoneyBaked ignores the plain language of the extension of coverage.

The extension applies only if"fnngus, mold or mildew is the direct result of direct physical

loss or damage insured by this policy." Where the fungus, mold or mildew is the direct result of

damage excluded by the policy, as is the case here, the provision simply does not apply. Had the

bacteria been the direct result of a flood, fire, or any conceivable risk not excluded by the policy,

it would, under the terms of the extension, be a covered loss. But the plain language of the policy

excludes coverage here.

3. The Businesslnterruption Provision

The parties agree that if the underlying claim is covered, either by the general coverage

provisions or the fungus, mold or mildew provision, coverage for the corresponding business

interpretation also exists. [Doc. 52, at 17]. This issue thus depends on whether HoneyBaked can rely

on the reasonable-expectations doctrine to assert coverage.

Conclusion

For the foregoing reasons, it is hereby:

ORDERED THAT:

1. The motion of the defendant for smnrnary judgment be, and the same hereby is

granted in part in accordance with this opinion; and

22


2. By January 15, 2011, the parties shall jointly propose a question or questions for

certification to the Ohio Supreme Court regarding whether, notwithstanding the

failure of the policy at issue otherwise to cover the plaintiff s loss, such loss might

be covered, contingent on jury findings of disputed facts, under Ohio law; failing

agreement as to such question(s), the parties shall submit their counter-proposals,

supported by a brief statement ofreasons in favor oftheirfonnulation and opposition

to that of the other party.

So ordered.

s/James G. CarrUnited States District Judge

23

Documents

ORtG^I^^I.Schottenstein, Zox & Dunn Co., LPA 250 West Street Columbus, OH 43215-2538 614-462-4938; fax 614-462-5135 [email protected]; [email protected] [email protected] Attorneys for