Pepsico, Inc. v Winterthur Intl. Am. Ins. Co.
Annotate this CaseDecided on December 10, 2004
Supreme Court, Westchester County
PEPSICO, INC., THE PEPSI BOTTLING GROUP, INC. and FRITO LAY, INC., Plaintiffs,
against
WINTERTHUR INTERNATIONAL AMERICA INSURANCE COMPANY and WILLIS OF NEW YORK, INC., Defendants
17053/01
JONES DAY
Attorneys for Plaintiffs
One Mellon Center - 31st Floor
500 Grant Street Pittsburgh, PA 15219
THOMAS H. SEAR
DAWN E. McFADDEN
222 East 41st Street
New York, New York 10022
MOUND COTTON WOLLAN & GREENGRASS
Attorneys for Defendant
WINTERTHUR INTERNATIONAL
AMERICA INSURANCE COMPANY
One Battery Park Plaza
New York, New York 10019
LOEB & LOEB
Attorney for Defendant
WILLIS OF NEW YORK, INC.
345 Park Avenue
New York, New York 10154
Kenneth W. Rudolph, J.
Upon the foregoing papers, it is ORDERED that this motion and cross motion are decided as follows:
On October 22, 2001, the plaintiffs, Pepsico, Inc., the Pepsi Bottling Group, Inc., and Frito Lay, Inc. (collectively, "Pepsico"), commenced this action against their insurer, Winterthur International America Insurance Co. ("Winterthur"), and its insurance broker, Willis of New York, Inc., ("Willis"), for declaratory relief and damages. Beginning in 1999 and continuing into 2000, several events caused damage to Pepsico's products and resulted in substantial property losses. Pepsico claims that it sustained losses when its products were rendered unfit for consumption or unmarketable by the introduction of ingredients contaminated with components not within the specifications for such products.
Pepsico is presently moving for partial summary judgment. It seeks an order declaring that the proper measure of damages under the subject insurance policy is the insured's regular cash selling price. It notes that although the losses in this case involved liquid beverage concentrate and finished goods, Winterthur has insisted on pursuing discovery relating to the cost of materials used in the plaintiffs' manufacturing operations. Winterthur has cross-moved for partial summary judgment on the grounds that as a matter of law, Pepsico has not suffered any physical loss or damage, requiring dismissal of its coverage claims; if property damage is found, that the "latent defect" exclusion of the subject policy applies; that the "manufacturing or processing" exclusion is a part of the subject policy; and, if the exclusions are inapplicable, that the property losses incurred must be valued at replacement cost. Willis opposes that part of Winterthur's cross motion that seeks partial summary judgment declaring that the "manufacturing or processing" exclusion is applicable because Willis says that this exclusion is not even part of the subject policy. [*2]
We turn firstly to the issue of whether the losses incurred by Pepsico are in fact covered under the subject policy. Winterthur seeks dismissal of all claims for coverage on the basis that Pepsico has failed to show that its products were in fact physically damaged. In other words, Winterthur asserts that physical damage, as that term is set forth in the subject policy, necessarily involves a change in the physical condition of the product from good to bad and in this case, Pepsico only shows that its products were of poor quality at the time of their creation and not that good products were subsequently damaged.
Pursuant to the subject policy, "all risks of physical loss of or damage to property" described in the policy are insured. Among other things, Pepsico's interest in all real and personal property owned, used or intended for use by it, or in which they have an interest or sold is covered under the policy. In other words, Pepsico's losses are arguably covered by the subject policy if the products suffered "physical damage". The subject policy does not define physical loss or damage. Essential to the construction of this phrase is an examination of the entire policy to determine its purpose and effect and the apparent intent of the parties (see, Murray Oil Prods., Inc. v Royal Exch. Assur., 21 NY2d 440). While it may reasonably be argued that the term "physical damage" should be read as Winterthur would have us read it here (see, City of Burlington v Indemnity Ins. Co. of North America, 332 F3d 38 [2d Cir]), such a construction is by no means clear from either the language or purpose of the policy. An insurer may not accept premiums under the provisions of an ambiguous policy which the insured may be justified in believing provides a particular form of coverage and then avoid liability by arguing that the policy is inapplicable to the contingency (see, e.g., Murray Oil Prods., Inc. v Royal Exch. Assur., 21 NY2d 440). Insofar as the meaning of physical loss or damage that was
intended by the parties, it cannot be discerned from the four corners of the subject policy. The court cannot state that, as a matter of law, Pepsico did not suffer physical damage under the circumstances present herein.
The policy states that it does not insure, "... latent defect; unless physical damage not excluded by this policy results, in which event, this policy shall cover such resulting damage". Winterthur notes that the alleged defects in Pepsico's products and ingredients passed quality control tests without detection. Thus, any defect was necessarily latent. Pepsico relies on the policy's ensuing loss provision (in italics above) in rejecting the applicability of the latent defect exclusion. If Winterthur's initial assertion is correct; that is, that the [*3]inclusion of unsuitable ingredients to its beverage concentrate and finished bottled soft drinks does not result in "physical damage" (a determination that has not been made at this juncture), then the loss was not covered regardless of whether it qualifies as a latent defect or, for that matter, whether any other exclusion applies (see, City of Burlington v Indemnity Insur. Co. Of N. America, 332 F3d 38, 43-44).
Winterthur also alleges that there is a "manufacturing or processing" exclusion in the subject policy. Both Willis and Pepsico state that this exclusion never became part of the policy. The term of the subject policy ran from October 1, 1998 to October 1, 2001. Neither the binder dated September 30, 1998, nor the final policy issued April 20, 1999, contain a "manufacturing or processing" clause. Although Winterthur now suggests that by several letters and/or fax transmissions it included this exclusion, the record does not support that there was ever a "meeting of the minds" on this particular issue between the time of the issuance of the binder to the time the policy was actually issued (compare, Insur. Corp. of Ireland, Ltd. v KCC New York Syndicate Corp., 174 AD2d 362).
Lastly, both Pepsico and Winterthur seek the court to determine, as a matter of law, what is the proper measure of damages applicable to the losses incurred by Pepsico in this case. In the subject policy, under the section titled "Valuation", it states that "as respects all insured property (unless specifically addressed elsewhere in the policy) the payment for loss shall be on a replacement cost new basis". However, in that same section it states that the basis of valuation for stock inventory shall be at the insured's regular cash selling price. Pepsico states that its principal products are soft drink beverage concentrate and finished soft drinks. In this matter, it sustained losses to its products (stock inventory) rendering them commercially valueless. Winterthur responds that the alleged damaged products were not stock inventory. At the time the faulty ingredients were mixed, the allegedly damaged materials were not completed products; that is, the alleged damage occurred to the product before the manufacturing process had been completed, before it was stock inventory and before it had a regular cash selling price.
Although the subject policy does not define the term stock inventory, the court finds that term to be clear and unambiguous. Accordingly, this court will not strain to superimpose an unnatural or unreasonable meaning to that term (see, Maurice Goldman & Sons, Inc. v Hanover Insur. Co., 80 NY2d 986; Morales v Allcity Insur. Co., 275 AD2d 736; Reynolds v [*4]Standard Fire Insur. Co., 221 AD2d 616) and in construing it in a manner consistent with its plain meaning, the court finds that if the losses incurred by Pepsico in this matter constitute physical damage within the meaning of the subject policy, the proper measure of damages would necessarily be "regular cash selling price".
Accordingly, Pepsico's motion for partial summary judgment is granted and Winterthur's cross motion is denied in its entirety.
The foregoing constitutes the Decision and Order of this Court.
Dated: White Plains, New York
December 10, 2004
E N T E R,
HON. KENNETH W. RUDOLPH
Justice of the Supreme Court
TO: JONES DAY
Attorneys for Plaintiffs
One Mellon Center - 31st Floor
500 Grant Street
Pittsburgh, PA 15219
THOMAS H. SEAR
DAWN E. McFADDEN [*5]
222 East 41st Street
New York, New York 10022
MOUND COTTON WOLLAN & GREENGRASS
Attorneys for Defendant
WINTERTHUR INTERNATIONAL
AMERICA INSURANCE COMPANY
One Battery Park Plaza
New York, New York 10019
LOEB & LOEB
Attorney for Defendant
WILLIS OF NEW YORK, INC.
345 Park Avenue
New York, New York 10154
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
