In 2006, the FDA issued an "advisory" that "consumers not eat bagged fresh spinach" due to an E. coli outbreak. Fresh-Express Inc. ("Fresh Express") markets bagged fresh spinach. Although it was not the source of the E. coli outbreak, it suffered a significant loss of business due to the advisory. Fresh Express sought to recover these losses under its "TotalRecall+" insurance policy issued by Beazley Syndicate 2623/623 at Lloyd's and QBE Insurance Limited (collectively "Beazley"). Beazley denied the claim and Fresh Express filed a breach of contract and bad faith action against Beazley. Fresh Express prevailed at trial and recovered the $12 million policy limit. Beazley appealed.
The "TotalRecall+" policy covered "Accidental Contamination." Beazley agreed to "reimburse [Fresh Express] for losses ? arising out of Insured Events ? only where such losses arise because of ?[?] ?[?] ? Accidental Contamination." The policy defined "Accidental Contamination" as "[e]rror by [Fresh Express] in the manufacture, production, processing, preparation, [or] assembly ? of any Insured Products ? 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. "Insured Event" was defined to include "Accidental Contamination." The policy had a number of exclusions, including: "[a]ny expenses ? or any loss of Gross Profit for any reason other than as a direct result of an Insured Event"; "[a]ny governmental ban of or loss of public confidence in any Insured Product?"; and "[l]oss or damage directly or indirectly occasioned by ? the order of any governmental ? authority."
Within 24 hours of the advisory, bagged spinach had been completely removed from grocery stores throughout the U.S. Within a few hours of the advisory, Fresh Express stopped harvesting, processing, and distributing spinach products due to the advisory and the resulting loss of public confidence in spinach products.
Just days after the advisory was issued, two infected individuals in Kentucky implicated Fresh Express as a possible source of the spinach they had consumed. Around the same time, Fresh Express discovered some of its spinach was purchased in violation of its safety protocols specifically Fresh Express had purchased this spinach from suppliers who did not meet Fresh Express's "good agricultural practices."
The FDA initially declined to release Fresh Express from its public advisory because it was concerned Fresh Express was linked to the outbreak. Ultimately however the FDA determined Fresh Express was not the source of the contamination.
While the FDA was investigating whether Fresh Express was linked to the outbreak. Fresh Express made a claim under its "TotalRecall" policy. Beazley denied Fresh Express's claim. Fresh Express then filed its suit for breach of contract and bad faith.
The trial court concluded Beazley had breached the policy because Fresh Express had established "errors" within the meaning of the policy in the form of the purchases made in violation of its own food safety standards. The court found Fresh Express had "reasonable cause to believe that these errors .. had led or would lead to bodily injury." The trial court found inapplicable the exclusion regarding "a 'governmental ban'" because the FDA advisory "was not a ban." The court concluded Fresh Express's damages were "directly caused by an Insured Event, here the 2006 E. coli outbreak?." it alternatively found that, "even under Beazley's interpretation of the policy, Fresh Express's losses would be covered because (1) Fresh Express's "errors prevented Fresh Express from seeking a full exemption from the FDA advisory and (2) Fresh Express's "errors" would have required a recall but for the FDA advisory.
Beazley appealed. It argued the trial court misinterpreted the policy when it concluded the E. coli outbreak was an "Insured Event." It also argued the trial court erred because all of the losses established by Fresh Express at trial were attributed to the E. coli outbreak, an event that was not covered by the policy.
The Court of Appeal agreed. Under the clear and unambiguous policy language, "Insured Event" equated with "Accidental Contamination " and "Accidental Contamination" was narrowly defined to refer to actual or potential contamination by an "[e]rror" committed by Fresh Express. Only losses which were the "direct result" of an "error by Fresh Express" were therefore covered under the policy. Since the E. coli outbreak was not an error by Fresh Express, the Court ruled the "outbreak" could not qualify as an "Insured Event."
The Court also rejected the trial court's alternative finding that Fresh Express's losses would be covered. No substantial evidence upheld this ruling. No evidence was presented at trial linking Fresh Express's losses to its own errors. None of the spinach associated with Fresh Express's errors was linked to the E. coli outbreak, and the FDA had no knowledge of the errors when it issued its advisory. Fresh Express also admitted its decision to stop harvesting, producing and distributing spinach was based on the FDA advisory, not on Fresh Express's errors. Fresh Express produced no evidence that an exemption of its spinach from the advisory at that point would have precluded its losses.
On these grounds, the appellate court reversed and remanded with directions to enter a judgment of dismissal.
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