"Voluntary” Recalls and Third Party Insurance Claims

By Paul Rovella

Shortly after the recent E. coli out-break attributed to bagged spinach, the federal Food and Drug Agency released a statement that the tainted spinach was grown in either Santa Clara, San Benito or Monterey Counties. Experts and government inspectors descended on the Salinas Valley in order to track down the source of the outbreak. Fueled in part by this new attention, several growers were pressured into making the difficult and costly decision to “voluntarily” recall their products from the marketplace or to “voluntarily” plow under their spinach fields.

These precautionary measures, alt-hough necessary, forced those who made them to face economic hard-ship. As spinach has been allowed back on the shelves of grocery stores, and as the industry begins to implement safety measures to prevent future outbreaks, the growers who took these “voluntary” safety measures may begin to search for ways to recover from the losses suffered from destroying their product. However, the affected suppliers may not be able to look to the source of the outbreak or its insurer for repayment.

*I. Claims Against the Source
A third party grower, forced to suffer economic damages because of the public response to an outbreak caused by an unrelated party, probably wouldn’t be successful in attempting to recover from the grower deemed responsible for the outbreak. Assum-ing there was no oral or written con-tract between growers requiring that they provide untainted spinach to consumers and suppliers, there could be no breach of contract claim. Assuming also that the third party grower did not purchase any of the tainted spinach, there is no applicable breach of warranty claims. In addition, a third party grower seeking to recover lost profits probably could not succeed in a products liability claim because there has been no physical injury sustained by the claimant. A third party grower-claimant would have the highest likelihood of recovering damages under a claim of negligence; however such a claim would be unlikely. California courts have established that in order to succeed on a claim for negligence, a grower would have to show that the source of the outbreak owed its market competitors a duty of care and that it breached that duty when it provided tainted spinach to consumers and/or suppliers. Further, the third party claimant would have to prove that as a result of this action, it incurred damages for which it could be compensated. Duty and causation would be the biggest hurdles to a third party claimant seeking to recover based on a negligence claim.

a. Duty

California courts have held that people should be held responsible not only for the result of their voluntary acts, but also for injuries to others which are caused due to a lack of ordinary care or skill in undertaking such acts. California courts have established legal duties in cases of a particular type where liability should be imposed for the harms caused to others. In these instances, actors have a duty not to act so negligently as to disregard the threat their actions pose to others.

No California court has ever held that market competitors owe each other a duty to conduct business in a way that protects each other’s expected profits. A court would be hard pressed to find that the source grower owed a duty to another spinach grower to conduct its business in a way that would ensure that the other spinach grower would continue to earn the same level of profit from the sale of its products.

Further, public policy dictates that such a duty would be impossible to fulfill. Courts are willing to establish exceptions where duties are owed when it would be against public policy to enforce such duties. Public policy exceptions are established based on a variety of factors such as the foreseeability of harm to the plaintiff, the certainty of claimant’s injury, the relation between the source’s conduct and claimant’s injury, the moral blame attached to the defendant’s conduct, the desire to prevent future harm, the potential burden on the source, and the availa-bility and cost of insurance for the risk involved.

Imposing a duty upon market com-petitors to protect the each others’ expected profits could potentially result in mas¬sive numbers of lawsuits for any level of reduction in industry-wide revenues as a result of any negligible action, no matter how inconsequential, by an industry mem-ber. Any act, defensible or not, which could have lead to a downturn in the industry, would inevitably give rise to one or more lawsuits. The California court system could not handle such an increase in the num-ber of lawsuits it hears.

b. Breach

In the unlikely event that a court finds the source of the outbreak did have a duty to protect its competitors’ prof-its, the judge or jury must then decide whether the defendant’s protective measures were reasonable under the circumstances—that is, whether there was a breach of the duty of care. If a fact finder determines there was a breach, there still remains the ques-tion whether that breach was the cause of the plaintiff’s injuries.

A third party spinach grower may argue that the grower breached its

duty by failing to adhere to the Good Agricultural Practices (“GAPs”), established by the industry and in effect at the time of the outbreak. However, the development and im-plementation of the GAPs were not established for the protection of other industry members’ profits. They were implemented in response to bacteria outbreaks caused by con-sumption of certain food product for the protection of consumers from such microbial contamination. Even if the source did breach a duty, the duty breached was owed to consum-ers, not to its fellow spinach growers.

II. Claims Against the Insurer’s Source*

a. Common Law Fraud

Assuming that the third party spinach grower/claimant is not a named or additional insured on source’s insur-ance policy, there would be no privity of contract, and thus no contract-based claims against the insurer. For the third party grower/claimant to succeed on a claim of fraud against the source’s insurer, it would have to prove: (a) false representation; (b) knowledge of falsity; © intent to defraud; (d) justifiable reliance; and (e) damage.

Although courts do tend to err on the side of insurance coverage, under the common law claim of fraud, the claimant must still meet the elements explained above. A claim must first be filed, and the insurer must make false representations in the analysis of those claims. Provided this does not occur, the third party claimant would not have a cause of action for fraud. However, until this exchange takes place, we would not know whether or not a third party claimant could succeed.

b. Bad Faith Settlement of an Insurance Claim

Cal. Ins. Code § 790.03 states that “[t]he following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance. . . (h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices: . . . (5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasona-bly clear.” The California Supreme Court has concluded that CAL. INS. CODE § 790.03(h) does not establish a private claim. In other words, private citizens cannot sue for viola-tions of Cal. Ins. Code § 790.03(h). Therefore, A private third party grower/claimant is unable to file a bad faith settlement claim against the insurer.

However, the California Insurance Commissioner may file suit against source’s insurer under § 790.03 if it is determined that the insurer did not make a good faith attempt to reach a settlement on third party claims. An insurer is not required to settle such claims; it need only make a good faith attempt to settle. So long as the insurer can produce evidence of a good faith attempt to settle the claim, then there would be little likelihood of success.

In the event a source of an outbreak like the recent E. coli outbreak is ever determined, it would still be unlikely that a competitor who has suffered economic damages due to recalling their products would be able to re-cover from the source.

This article first appeared in Volume 1-1 of L+G’s Food Safety Newsletter, in April 2007.

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Categories: Recall