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CERTIFIED QUESTION OF STATE LAW PRELIMINARY … There is no question that Certified Questions of...
Transcript of CERTIFIED QUESTION OF STATE LAW PRELIMINARY … There is no question that Certified Questions of...
IN THE SUPREME COURT OF OHIO
HONEYBAKED FOODS, INC,
Petitioner,
V.
AFFILIATED FM INSURANCECOMPANY,
Respondent.
Case No. 2011-0391
On Review of Certified Question from theUnited States District Court, NorthernDistrict of Ohio, Western Division
U.S. Dist. Ct. Case No. 3:08CV01686
PETITIONER HONEYBAKED FOODS, INC.'SPRELIMINARY MEMORANDUM OF LAW IN SUPPORT OF ANSWERING THE
CERTIFIED QUESTION OF STATE LAW
SCHOTTENSTEIN, ZOX & DUNN, L.P.A.Alan G. Starkoff (0003286), Counsel ofRecordJeremy M. Grayem (0072402)250 West StreetColumbus, Ohio 43215T: 614-462-2700F: 614-462-5135astarkoff(7a,szd.comjgrayemna,szd.com
Counselfor Petitioner HoneyBaked Foods,Inc.
GIBBONS, P.C.Thomas S. BrownJennifer L. SemeSean P. Mahoney1700 Two Logan Square18th & Arch StreetsPhiladelphia, Pennsylvania 19103T: 215-446-6210F: 215-446-6317tbrown gibbonslaw.comjsemena gibbonslaw.comsmahoneyggibbonslaw.com
Michael G. Sanderson, Esq.Shumaker, Loop & KendrickNorth Courthouse Square1000 Jackson StreetToledo, Ohio 43624419-321-1261Fax: 419-241-6894Email: [email protected]
Counsel for Respondent Affiliated FM. Ins.Co.
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TABLE OF CONTENTS
CERTIFIED QUESTION OF STATE LAW ............................................................................. 1
STATEMENT OF THE CASE AND FACTUAL BACKGROUND ....................................... 2
ARGUMENT IN SUPPORT OF ACCEPTING THE CERTIFIED QUESTION ................. 4
A. Certified Question of State Law: In light of the Supreme Court of Ohio'sopinion in Andersen v. Highland House Co., 93 Ohio St.3d 547 (2001), does thereasonable-expectations doctrine apply to a commercial general liability "all-risk"insurance policy, so that coverage, which otherwise would be excluded under theterms and conditions of the policy, is afforded, provided the trier of fact determinesthat the insured reasonably expected, when purchasing the policy, that thepoGcywould cover the loss at issue? ................................................................................................... 5
B. This Court should accept the Certified Question of State Law, find thatOhio does recognize the Reasonable-Expectations Doctrine, and find that it appliesto HoneyBaked's claim against Affiliated ............................................................................... 9
CONCLUSION ........................................................................................................................... 10
CERTIFICATE OF SERVICE ................................................................................................. 11
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TABLE OF AUTHORITIES
State Cases
Andersen v. Highland House Co., 93 Ohio St.3d 547 (2001) ..................................................... 1, 5
Buckeye Ranch, Inc. v. Northfield Ins. Co., 134 Ohio Msc.2d 10 (Franklin County 2005) ....... .... 8
I.G.H. 77 v. Selective Ins. Co. of South Carolina, 2007-Ohio-2258 (Sixth App. Dist. 2007) ......... 8
Wallace v. Balint, 94 Ohio St.3d 182 (2002) ...................:.............................................................. 7
Secondaryand Other Sources
Insurance Coverage Litigation, L. Masters, J. Stanzler, E. Anderson, and W. Passannante,2011 Supplement, § 2.05, The Reasonable Expectations Doctrine .. .............................................. 8
Keeton, Insurance Law Rights at Variance with Policy Provisions, ( 1970), 83 Harv.L.Rev. 61 ... 7
Restatement of Law 2d, Contracts, Section 211, Commentf ......................................................... 6
[H2199817.31 n
CERTIFIED QUESTION OF STATE LAW
The United States District Court, Northern District of Ohio, Western Division has
certified the following question of fundamental Ohio law to this Court:
In light of the Supreme Court of Ohio's opinion in Andersen v. Highland HouseCo., 93 Ohio St.3d 547 (2001), does the reasonable-expectations doctrine apply toa commercial general liability "all-risk" insurance policy, so that coverage, whichotherwise would be excluded under the terms and conditions of the policy, isafforded, provided the trier of fact determines that the insured reasonablyexpected, when purchasing the policy, that the policy would cover the loss at
issue.
This Court should accept the Certified Question of State Law and should answer the question in
the affirmative. This Court should hold that the reasonable expectations doctrine (or its
underlying rationale), which this Court has referenced and considered in prior decisions, and
which has been adopted by the overwhelming majority of states, is applicable to the factual
scenario in this case.
The Certified Question not only impacts this case, but also has a profound impact on the
relationship between insurers and insureds throughout Ohio. Insureds should not be penalized
and denied basic coverage they reasonably believed they had purchased based upon an insurer's
self-serving interpretation of hyper-technical and indecipherable policy language. If, as in this
case, an insured reasonably believed it had purchased coverage for a distinct loss, based on all of
the facts and circumstances, that loss should be covered despite a determination that the terms
and conditions of the policy exclude the loss. That is the fundamental underlying rationale for
the reasonable-expectations doctrine, which Petitioner submits should be officially recognized by
this Court and applied in this case.
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STATEMENT OF THE CASE AND FACTUAL BACKGROUND
Petitioner HoneyBalced Foods, Inc. ("HoneyBaked") processes and sells specially glazed
and spiral-sliced hams and turlcey breasts, along with other products. HoneyBaked's Toledo
facility purchases fully-cooked, spiral sliced hams and turkey breasts from select suppliers,
applies a special glaze, and then repackages and freezes the product for shipment to customers or
delivery to retail sites. HoneyBaked was introduced to Respondent Affiliated FM Ins. Co.
("Affiliated") as a possible insurer. In November 2005, prior to selling HoneyBaked the subject
All-Risk Insurance Policy, Affiliated conducted a site visit of HoneyBaked's Toledo facility, and
completed a Risk Report, which clearly and prominently declared:
"The most significant and common hazards exposing the food industry are centered on thesusceptihility of food products to spoilage and contamination."
Affiliated FM's Risk Report for HoneyBakedFoods, Inc., dated November 17, 2005.
Randy Rigdon, Affiliated's general claims adjuster for this claim, would later testify:
"I certainly think that loss of a food product is one of the significant risks that a companylike HoneyBaked Foods has to deal with."
Randy Rigdon, Affiliated FM's GeneralAdjuster, Deposition Testimony.
Mindful of this assessment and the predominant risk facing its operations, HoneyBaked
purchased this so-called All-Risk Policy from Affiliated, effective April 1, 2006, through April
1, 2007. The Policy states:
A. PERILS INSURED
This policy insures against all risks of direct physical loss or damage to
insured propcrty except as excluded under this policy.
The Policy also sets forth exclusions, stating in pertinent part:
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F. PERILS EXCLUDED
GROUP II. This policy does not insure against loss or damages causedby the following; however, if direct physical loss or damage insured bythis policy results, 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 or materials attributable to manufacturing orprocessing operations which such stock or materials are being processed,manufactured, tested, or otherwise being worked upon.
5. Contamination, including but not limited to pollution.
HoneyBaked paid Affiliated the full $79,490.00 annual premium for the "coverage."
At the height of HoneyBaked's peak production season, November through December
2006, random sampling revealed that certain of HoneyBaked's products had tested positive for
Listeria Monocytogenes ("Lm") and were, therefore, unable to be introduced into commerce and
sold to consumers. As a result of the Lm discovery, HoneyBaked was forced to suspend
operations twice during this peak season and destroy nearly one million pounds of product.
HoneyBaked followed all state and federal investigation, recall and remediation procedures
following the discovery of the Lm.
There is no dispute that HoneyBaked notified Affiliated of the loss in a timely manner.
Affiliated's claims adjuster, Randy Rigdon, performed a site visit shortly thereafter. However,
on January 22, 2007, at the very outset of Mr. Rigdon's investigation and assessment, Affiliated
issued a Notice of Cancellation or Nonrenewal to HoneyBaked, declining to renew
HoneyBaked's All-Risk Policy. The investigation continued throughout 2007, and on March 4,
2008, Affiliated issued HoneyBaked a letter denying HoneyBaked's claim in full.
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HoneyBaked had not submitted a claim for payment regarding claims made by third
parties who may have suffered damages after receiving product with Lm. HoneyBaked had not
sought recovery for costs and expenses incurred in administering the product retrieval program
and voluntary recall of the affected product. Instead, HoneyBaked only sought recovery from
Affiliated for the adulterated product which was required to be removed or withheld from
commerce and ultimately destroyed, and for the business interruption damages HoneyBaked
sustained.
Affrliated improperly denied this claim and HoneyBaked was forced to bring a
declaratory judgment action against Affiliated. The District Court found that there was no
coverage by virtue of the policy exclusionary language. However, the District Court also held
that, should Ohio recognize the reasonable-expectations doctrine, coverage could be found by a
jury if HoneyBaked reasonably expected that it had purchased coverage for this type of loss.
This is the question that was certified to this Court.
ARGUMENT IN SUPPORT OF ACCEPTING THF. CERTIFIED QUESTION
Ohio Supreme Court Rule of Practice XVIII authorizes a federal court to certify novel
issues of Ohio law to this Court. This process allows this Court - and not federal courts - to
determine issues of Ohio law that are unclear. This process provides federal courts with the
necessary guidance to resolve the legal questions and issues before them. Rule XVIII guarantees
that the application of Ohio law is consistent by and between Ohio's state and federal courts -
promoting judicial comity. There is no question that Certified Questions of State Law from
federal courts are rare, and correspondingly, of premium importance. Between 2008 and 2010,
there were only eleven (11) Certified Questions of State law filed with this Court from Ohio's
federal courts, and of those eleven Certified Questions, ten (1.0) were accepted. The only
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Certified Question that wasn't accepted was dismissed because the Petitioner failed to timely file
its Preliminary Memorandum.
This Certified Question presents an important principle of Ohio law that has not been
resolved by this Court - whether or not the reasonable-expectations doctrine is recognized in
Ohio and, correspondingly, whether it applies to the facts and circurnstances of this case. This is
a matter of fundamental importance for insureds throughout Ohio who could, and in all
probability would, be denied insurance coverage they reasonably believed they had purchased.
Accordingly,; HoneyBaked respectfully requests that the Court accept the certified question and
answer it in the affirmative.
A. Certified Question of State Law: In light of the Supreme Court of Ohio's opinion in
Andersen v. Highland House Co., 93 Ohio St.3d 547 (2001), does the reasonable-expectations doctrine apply to a commercial general liability "all-risk" insurancepolicy , so that coverage which otherwise would be excluded under the terms andconditions of the policy, is afforded, provided the trier of fact determines that theinsured reasonably expected , when purchasinj4 the policy, that the nolicy wouldcover the loss at issue?
This Court has discussed the reasonable-expectations doctrine in prior decisions, yet has
not definitively stated whether Ohio recognizes this doctrine or its underlying rationale.
In Andersen v. I-Iighland Ilouse Co., 93 Ohio St.3d 547 (2001), this Court discussed the
reasonable-expectations doctrine in conjunction with the application of a pollution exclusion in a
commercial insurance policy. Lisa Andersen died and Daniel Wojtala was injured from inhaling
carbon monoxide fumes inside the Highland House Apartment Complex in March 1997. (Id. at
547.) Highland House, and its property manager RMI, were insured through commercial
policies issued by Indiana Insurance Co., all of which contained pollution exclusions. The
underlying tort claims by the claimants were settled and the primary issue on appeal became
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whether the policies' pollution exclusions excluded coverage, thereby relieving Indiana Ins. Co.
of its obligation to defend and/or indemnify Highland House and RMI. (Id.)
The subject pollution exclusion stated:
2. Exclusions.
This insurance does not apply to:
f. Pollution
(1) Bodily injury or property damage arising out of the actual, alleged orthreatened discharge, dispersal, seepage, migration, release or escape of
pollutants;
(a) At or from any premises, site or location which is or was at any time ownedor occupied by, or rented or loaned to, any insured;
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant,including smolce, vapor, soot, fumes, acids, alkalis, chemicals and waste.
(Id. at 548.)
In evaluating this exclusion, this Court held:
In the case at bar, the policy in question never clearly excludes claims for deathsor injuries caused by residential carbon monoxide poisoning. It is not theresponsibility of the insured to guess whether certain occurrences will or will notbe covered based on nonspecific and generic words or phrases that could beconstrued in a variety of different ways.
(Id. at 549.) (emphasis added.)
This Court then went through an examination of the subject pollution exclusion and
determined it was reasonable for Highland House RMI to believe that the commercial policies
they purchased for the multi-unit apartment complex would not exclude claims for injuries
resulting from carbon monoxide leaks. (Id. at 550.) Citing the Restatement of Law 2d,
Contracts, Section 211, Commentf the Court went onto hold:
The legal effect of the reasonable belief on the part of Highland House and RMIis comparable to the effect of the reasonable expectations doctrine.
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'Similarly, a party who adheres to the other party's standard terms does not assentto a term if the other party has reason to believe that the adhering party would nothave accepted the agreement if he had known that the agreement contained aparticular term. *** Reason to believe may be inferred from the fact that the termis bizarre or oppressive, from the fact that it eviscerates the non-standard termsexplicitly agreed to, or from the fact that it eliminates the dominant purpose of the
transaction.'
***
While we make no determination on the merits of the reasonable-expectationsdoctrine, this rationale could apply to the case at bar.
Highland and RMI reasonably believed that Indiana Insurance would defend andindemnify them against claims related to potential premises hazards and did notanticipate that such claims would be denied based on the pollution exclusion.
(Id. at 550-551.)
This Court revisited the reasonable-expectations doctrine in Wallace v. Balint, 94 Ohio
St.3d 182 (2002) in connection with the insureds' (the Wallaces) claim that they were entitled to
uninsured/underinsured motorist coverage under a series of polices issued by State Farm Ins. Co.
State Farm argued that anti-stacking provisions precluded certain coverage under these policies.
(Id. at 182-183.) One of the arguments asserted by the Wallaces was that the reasonable-
expectations doctrine applied to these policies, and that they reasonably expected coverage under
all of these policies. (Id. at 189.)
This Court cited Keeton, Insurance Law Rights at Variance with Policy Provisions,
(1970) 83 Harv.L.Rev. 61, for the following description of the reasonable expectations doctrine:
The objectively reasonable expectations of applicants and beneficiaries regardingthe terms of insurance contracts will be honored even though painstaking study ofthe policy provisions would have negated those expectations.
(Id.). This Court went on to state that, at that time, a majority of the Court was not willing to
accept the reasonable-expectations doctrine.
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However, lower Ohio courts have taken notice of this doctrine and the Ohio Supreme
Court's discussion of the same. In Buckeye Ranch, Inc. v. Northfzeld Ins. Co., 134 Ohio Msc.2d
10 (Franldin County 2005), the Franklin County Common Pleas court examined this doctrine in
connection with Northfield Ins. Co.'s denial of coverage to Buckeye Ranch for a sexual assault
between roommates that occurred at the Buckeye Ranch. The Buckeye Ranch had purchased
"prior acts" coverage from Northfield when it switched coverage to Northfield, presumably for
this very type of incident. (Id. at 16; 28-30.)
In finding that the Buckeye Ranch did have coverage, the trial court held:
The decision by the Ohio Supreme Court in I3arasyn illustrates the praatnatic
anproach taken to understanding what parties thou¢ht they would receive whenbuyine insurance, which appears similar to the reasonable-expectations doctrine
used in other iurisdictions.
Everyone agrees that a prior-acts endorsement was purchased to avoid any gap incoverage that otherwise might exist due to the transition from claims-madecoverage to an occurrence-based policy. *** A broad reading of the exclusion inthe prior-acts coverage endorsement cannot have been within the contemplation
of either the insured or the insurer.
(Id. at 30-31.) (emphasis added.) (See also I.G.K II v. Selective Ins. Co. of South Carolina,
2007-Ohio-2258 (Sixth App. Dist. 2007), also referencing the Ohio Supreme Court's discussion
of the reasonable-expectations doctrine on Anderson.)
This Court's determination of whether Ohio recognizes the reasonable-expectations
doctrine should also be evaluated against the national backdrop. A national survey reflected in
the treatise Insurance Coverage Litigation L. Masters, J . Stanzler, E. Anderson, and W.
Passannante, 2011 Supplement $ 2 05 The Reasonable Expectations Doctrine, reveals that the
high courts in thirty-six (36) states and the District of Columbia have recognized some
formulation of Professor Keeton's reasonable expectations doctrine, while only eight (8) states
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have rejected the doctrine. According to this survey, Ohio is one of only eight (8) states which
has not expressly adopted or rejected the doctrine.
B. This Court should accept the Certified Question of State Law , find that Ohio does
recognize the Reasonable-Expectations Doctrine, and find that it applies to
HoneVBaked's claim against Affiliated.
This is an issue of fundamental importance for insureds, and insurers, throughout the
State of Ohio. If, based on the facts of circumstances surrounding the purchase of insurance, the
insured reasonably expected that the coverage it was acquiring would cover a particular loss,
coverage should not be prohibited based on the self-serving and hyper-technical policy
interpretation advanced by the insurer. Forty-four (44) other states, and the District of Columbia,
have specifically adopted or rejected some form of this doctrine, with the vast majority adopting
it. It is Ohio's turn to determine if and how the reasonable expectations doctrine is applied. This
Court should accept the Certified Question posed by the District Court.
Further, this Court should answer the Certified Question in the affirmative, and find that
the reasonable expectations doctrine does apply to the factual background at issue in this case.
Here, prior to selling HoneyBaked the so-called "All-Risk" Policy, Affiliated conducted a site
visit and risk assessment and unequivocally stated that spoilage and contamination were the most
significant and common hazards faced by HoneyBaked and its industry. Inexplicably, Affiliated
then sold HoneyBalced an "All-Risk" Policy which it now claims does not cover that most
significant risk faced by HoneyBaked - food contamination.
As Professor Keeton stated:
The objectively reasonable expectations of applicants and beneficiaries regardingthe terms of insurance contracts will be honored even though painstaking study ofthe policy provisions would have negated those expectations.
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Based on the facts of this case, HoneyBaked had the objectively reasonable expectation
that the "All-Risk" Policy it purchased from Affiliated would cover loss caused by contamination
- especially when Affiliated had just informed HoneyBalced that contamination was the most
common and significant risk HoneyBaked faced. The District Court found that the policy
language relied upon by Affiliated to deny the claim was "awkward," but ultimately
decipherable. HoneyBaked respectfully disagrees with the District Court's conclusion in that
respect, as even a cursory examination of the subject exclusionary language reveals its confusing
and ambiguous nature. Regardless, insureds, such as HoneyBalced, should not be put in a
position where they must pour over every provision in a complicated (and often indecipherable)
insurance policy to determine if the coverage they believed they were buying was actually
obtained.
CONCLUSION
For all of the foregoing reasons, HoneyBaked respectfully requests that this Court accept
the Certified Question of State Law submitted by the District Court, and answer it in the
affirmative.
HOTTENSTEIN 7,(W)UNN CO., LPAAlan G. Starkoff (000320)Jeremy M. Grayem (0072402)250 West StreetColumbus, Ohio 43215-2538Telephone: 614-462-2700Facsimile: 614-462-5135E-Mail: astarkofC szd.com
jg_rayemgszd.comCounsel for Petitioner HoneyBaked Foods, Inc.
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CERTIFICATE OF SERVICE
1'he undersigned hereby certifies that the foregoing Plaintiff HoneyBaked Foods, Inc.'s
Preliminary Memorandum was filed and served this 30th day of March, 2011, via regular U.S.
mail, postage prepaid, upon:
Thomas S. Brown, Esq.Jennifer L. Seme, Esq.Sean P. Mahoney, Esq.Gibbons1700 Two Logan Square18th & Arch StreetsPhiladelphia, Pennsylvania 19103215-446-6210Fax: 215-446-6317Email: [email protected]@gibbonslaw.comsmahoney(a) gibbonslaw. com
Michael G. Sanderson, Esq.Shumaker, Loop & KendrickNorth Courthouse Square1000 Jackson StreetToledo, Ohio 43624419-321-1261Fax: 419-241-6894Email: [email protected]
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