Riverdale is an organic company that sells probiotic tablets.
The tablets were being manufactured overseas but they lacked in hardness, and were losing their coating. Riverdale decided to contract Poptates, a local manufacturing business, to produce the tablets and improve their quality and yield.
Poptates ground up the rejected tablets and used these in a new formula with the introduction of a binding agent and new probiotic product. The first three batches encountered high failure rates. However, the fourth batch, made with only new product and a binding agent, had a higher success rate.
Riverdale asked Poptates to manufacture two million tablets and supplied it with new probiotic product. Poptates decided to save some of the rejected tablets from a previous batch and added this in with extra binding agent. However, Poptates did not realise that the coating material from the old batch would cause the tablets to separate and crack. The entire batch was ruined and could not be used.
Riverdale decided to claim the cost of its raw materials from Poptates for the ruined batch; so Poptates contacted its insurer and lodged a claim under its general liability policy.
Claim declined
However, the insurer declined Poptates’ claim. The insurer said Poptates’ policy only covered it for unexpected or unintended events. The loss of the latest batch of tablets was not unexpected nor unintended as Poptates was engaged in a trial and error production process for Riverdale.
Poptates complained to FSCL.
Dispute
Poptates argued that it did not expect the coating material from a previous batch to ruin the entire new batch. The loss was both unexpected and unintended and be covered under their policy.
Dispute
Poptates asked us to review the insurer’s decision to check whether the policy wording had been applied correctly.
Review
Upon review, we found that Poptates was not solely engaged in a “trial and error” process for product development. Riverdale had contracted Poptates to manufacture probiotic tablets for it with the intention of improving the yield.
However, Poptates used an untested formula and suffered a loss. It had been using different formulas with each batch and suffering varying degrees of loss in yield. Therefore, we found that the loss of the latest batch could not be said to be “unexpected”.
Resolution
Although both parties had strong arguments, we agreed with the insurer’s view and wrote to the parties outlining our reasoning.
We did not receive any further submissions from Poptates and closed our file.
Insights
When an insurer makes a finely balanced decision, the insured may benefit from having the decision reviewed by an independent body. In this case, we agreed with the insurer’s reasoning and were able to explain to Poptates that the insurer had applied the policy wording correctly.
