Losses from Erroneously Underpriced Products Due to Mislabeling Not Covered as Property Loss Claim under Commercial Liability Policy
Wisconsin Label Corp. v. Northbrook Property & Casualty Ins. Co., 607 N.W.2d 276, 233 Wis., 2d 314 (Wisconsin Supreme Court, 2000)
Marketing promotions such as a "2 for 1" sale or "buy one, get one free" can often serve as a "loss leader" for businesses interested in getting consumers to try products they have not previously used. But where mishaps in labeling the product promotion lead to more losses than anticipated, this is an uninsured event, not one for which the mislabeling company can obtain standard liability insurance coverage.
In 1992, Ameripac (a subsidiary of Wisconsin Label) contracted with Personal Products Company (PPC) to assemble two separate PPC products (Stayfree Maxi-Pads and Carefree Panty Shields) into a single promotional package for retail sale. Under the promotion, "a consumer who purchased a box of Maxi-Pads would also receive at no additional charge a box of Panty Shields." The two products were to be packaged together, and the bar codes for the two different products were to be covered with a bar code reflecting only the price of the Maxi-Pads ($2.47), which sold for approximately twice the price of the Panty Shields ($1.16).
More than 350,000 of the packages were assembled and distributed to various Wal-Mart stores for retail sale-then the trouble began. Wal-Mart claimed that Ameripac had botched the labeling so that many of the packages, when scanned at the cash register, rang up the lower price of the Panty Shields rather than the higher price of the Maxi-Pads. Unhappy at having undercharged and lost money on this inventory, Wal-Mart sought compensation from PPC, which paid Wal-Mart approximately $200,000. Having paid Wal-Mart, PPC turned to Ameripac to reimburse it for the faulty labeling. In addition to the $200,000 claim, PPC sought $25,000 in reinspection costs and offset against this claim $125,000 in unpaid invoices to Ameripac.
The remaining PPC claim for $100,000 had not been actively litigated, but Wisconsin Label, parent company of Ameripac, sought insurance coverage for the claim under its commercial general liability policy (CGL) with Northbrook after the insurer denied coverage. The Wisconsin Supreme Court unanimously upheld the insurer's position, ruling that the claim for lost income due to mislabeled products was not a claim for "property damage" under the standard CGL language employed by Northbrook. 607 N.W.2d at 276,279.
Standard CGL language provides coverage to a policyholder or another insured when a claim is made against it for bodily injury or property damage caused by an occurrence of negligence or oversight. Although Ameripac's mislabeling was an occurrence bringing about a claim for damages, the court found that there was no "property damage" within the meaning of the CGL. Property damage is defined in the CGL as "physical injury to tangible property" or "loss of use of tangible property that is not physically injured." Wisconsin Label's claim for damages failed to meet both prongs of the property damage definition.
First, the mislabeled products were not physically injured. The maxi-pads and pantyshields sold as part of this promotion were in factory issue condition when sold and were presumably used by the purchasers. No one had complained about the quality of the products, not even dented boxes or torn corners of the package. The problem was not one of injury to the items sold. The problem was that these perfectly acceptable and physically unaltered products had been unintentionally "priced" too low because of the mislabeling. 607 N.W.2d at 284. Interestingly, the court applied the notion of the objectively reasonable expectations of the insured against Wisconsin Label, a bit of a twist because the reasonable expectations approach is generally viewed as a doctrine favoring policyholders. "No reasonable insured would concluded that PPC's undamaged, saleable products suffered 'physical injury' simply because Wisconsin Label improperly placed the labels on the packages. …