California Court Rules Against Insurer over Losses from Spinach Contamination Outbreak
A California trial court has determined that the insurer of the nation’s largest seller of bagged fresh spinach must pay for its losses from the 2006 nationwide E. coli outbreak that led to a Food and Drug Administration (FDA) advisory against eating any fresh spinach. Fresh Express, Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, No. M88545 (Cal. Super. Ct., Monterey Cty., decided August 18, 2009). The outbreak was ultimately traced to a different producer, and the insurer denied coverage.
Following a bench trial, the court determined that (i) the produce company introduced sufficient evidence to establish that it committed “errors” within the policy’s meaning by failing, before purchasing spinach, to conduct a food safety audit of the field where it was grown to verify that the growers had complied with good agricultural practices; (ii) this verification of good practices compliance “was an integral and inseparable part of its safe manufacturing practices”; and (iii) sufficient evidence established that the produce company had reasonable cause to believe that these errors had led or would lead to bodily injury given the field’s proximity to a cattle feedlot. The court also found that the produce company provided sufficient and timely notice of the claim to its insurer and satisfied all conditions precedent for coverage.
While the court found that the insurer did not breach the implied covenant of good faith and fair dealing in denying the claim, it also found that the losses could not be excluded under the policy because they were caused by a “governmental ban” or “loss of confidence.” According to the court, the FDA advisory was not a ban because the agency “lacked the authority to ban any spinach under the circumstances,” nor were the produce company’s losses caused by a loss of public confidence. In this regard the court stated, “to read the Policy to Exclude coverage for losses related to ‘loss of public confidence’ when an Insured Event has occurred, such as coverage for lost gross profits and for rehabilitating the brand name after a recall or withdrawal, would render the coverage provisions under the policy meaningless.”
The court awarded the produce company the policy’s $12 million cap and left an award of prejudgment interest to a post-trial hearing.
