A policy that covered expenses and lost profits arising from the recall or withdrawal of a food product was not triggered where the insured’s errors did not actually cause an E. coli outbreak or a subsequent government product advisory. ( Fresh Express Inc. v. Beazley Syndicate 2623/623 (2011) WL 4552455)
Facts
After E. coli contamination of bagged fresh spinach caused numerous persons to become ill and one person to die, the United States Food and Drug Administration (FDA) issued a “no consumption advisory.” The E. coli outbreak and FDA advisory received widespread media attention, causing many consumers to lose confidence in the safety of bagged fresh spinach, and causing the market for this product to temporarily evaporate.
Fresh Express Incorporated (Fresh Express) harvests, processes and distributes bagged fresh spinach. Although the FDA’s advisory did not legally prevent producers from marketing bagged fresh spinach, Fresh Express voluntarily stopped marketing the product until the source of the contamination could be identified.
After the FDA issued its advisory, and after Fresh Express voluntarily stopped marketing bagged fresh spinach, Fresh Express determined that it had made some “spot” purchases from suppliers that violated corporate safety guidelines. These errors caused Fresh Express to suspect that it might have been responsible for the E. coli outbreak.
Ultimately, the FDA determined that Fresh Express was not the source of the contamination and, after identifying the actual source of the E. coli contamination, the FDA lifted the advisory. However, Fresh Express sustained substantial economic losses because of the advisory.
Fresh Express sought to recover its losses under an insurance policy issued by Beazley Syndicate 2623/623 at Lloyd’s and QBE Insurance (Europe) Limited (collectively, Beazley). The Beazley policy provided coverage for, among other things, expenses and lost profits associated with the recall/withdrawal of products caused by “Accidental Contamination.” The term “Accidental Contamination” was defined as: “Error by [Fresh Express] in the manufacture, production, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling (including instructions for use) of any Insured Products or error by [Fresh Express] in the storage or distribution of any Insured Products whilst in the care or custody of [Fresh Express] which causes [Fresh Express] to have reasonable cause to believe that the use or consumption of such Insured Products has led or would lead to: bodily injury, sickness, disease or death ….”
Beazley denied coverage for the claim, and Fresh Express filed an action against Beazley for breach of contract and bad faith. After a court trial, the judge awarded Fresh Express the policy limit of $12 million, but rejected Fresh Express’s claim that Beazley had acted in bad faith. Beazley then appealed.
Holding
The Court of Appeal reversed the judgment against Beazley. The appellate court held that the E. coli outbreak itself was not an insured event. Instead, the policy insured against errors by Fresh Express that Fresh Express reasonably believed would injure third parties.
Fresh Express did present substantial evidence that it had made errors by making spot purchases that did not comply with company guidelines. However, Fresh Express did not present substantial evidence of a nexus between its errors and the E. coli outbreak or the FDA advisory. In fact, Fresh Express’s damages witnesses testified unequivocally that Fresh Express’s damages were caused by the E. coli outbreak and the FDA advisory.
In addition, Fresh Express did not discover its violations of company purchasing guidelines until after the FDA had issued its advisory and after the consumer market for spinach temporarily had disappeared. Thus, there was no causal link between Fresh Express’s violation of its own purchasing guidelines and Fresh Express’s losses. In short, there was no evidence that Fresh Express’s losses were caused by Fresh Express’s errors.
Comment
This appears to be the only reported appellate decision in California that addresses coverage for expenses and lost profits associated with the withdrawal/recall of a product. Here, the Court of Appeal undertook an exhaustive review of the evidence, and concluded that Fresh Express’s expenses and lost profits were caused by the E. coli outbreak and FDA advisory – both of which occurred before Fresh Express discovered its purchasing errors. Thus, the Court concluded that Fresh Express’s errors simply were not the cause of either the product contamination or the subsequent FDA advisory.