On February 5th in a case involving the recall of over $500,000 worth of oyster products made from Korean shellfish, the Southern District of California held: (1) that the policy’s service of suit clause, which gave the insured the choice of forum, trumped a forum selection clause that provided for suit in a New York state court; (2) that California law, as opposed to New York law, applied, and (3) that for purposes of a 12(b)(6) motion, plaintiff’s complaint, which alleged potential contamination, was sufficient to state a claim. The decision is Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co., 2015 WL 728477 (S.D.Cal., Feb. 5, 2015); it is currently unreported by LexisNexis.

The case arose after Tri-Union Seafoods initiated a recall in response to the U.S. Food and Drug Administration (FDA) warning about potential contamination. The policyholder’s claim was denied by its product contamination carrier, Starr Surplus Lines, and Tri-Union then filed suit in federal court in California, where it was headquartered and incorporated. Starr’s response was a motion to dismiss based on the contract of insurance’s forum selection clause and/or to transfer to New York pursuant to 28 U.S.C. § 1404(a).

The body of the insurance contract included a forum selection clause establishing New York as the proper forum and source of applicable law. New York was Starr’s principal place of business. Importantly, New York law does not recognize either a cause of action for the tort of breach of the covenant of good faith and fair dealing or an action based on unfair competition, as alleged by Tri-Union under California Business and Professions Code section 17200, et. seq. Starr argued that the service of suit endorsement was not inconsistent with the policy’s forum selection clause and that the two provisions should be read in conjunction with one another. Contrary to Starr’s argument, however, Judge Michael M. Anello held that the service of suit clause modified the policy to permit plaintiff to choose a forum in which to file suit. He noted that the fact that Starr reserved the right to seek removal or transfer of the case to a different forum after plaintiff filed suit in its chosen forum did not alter or change Tri-Union’s ability to select the forum in the first place. 

Starr also sought to apply New York law with respect to the choice of law, as the policy provided that its construction, validity, and performance would be governed by the laws of the state of New York. Applying its conflict of law analysis, the court held that the parties’ choice of law generally will be enforced unless the challenging party can establish both that the chosen law is contrary to a fundamental policy of California and that California has a materially greater interest in the determination of the pending issue. After addressing the fundamentals of California bad faith law, the court recognized that the tort remedy for an insurer’s breach for the implied covenant of good faith and fair dealing, which was not available under New York law, implicated a substantial and thereby fundamental public policy in California. With the exception of Starr’s principal place of business, the court also explained that the factors considered in its evaluation supported the conclusion that California had a materially greater interest in resolution of the dispute than did New York. As such, the policy’s choice of law provision was held to be unenforceable.

Finally, Starr sought dismissal of the lawsuit because it argued there was no coverage for the product recall based on the policy’s language. The insurer contended that Tri-Union’s recall was voluntary and was motivated by speculation relating to potential contamination as opposed to being an instance of actual contamination sufficient to trigger coverage. In support of its argument, Starr cited numerous cases which hold that potential contamination is not sufficient to trigger coverage under similar contracts of insurance. It also argued that the absence of coverage would defeat plaintiffs’ breach of contract, bad faith, and unfair competition claims. Tri-Union responded that the pleadings sufficiently alleged both actual contamination and a government recall and that no further evidence was required at this early stage of the litigation.

Evaluating the parties’ arguments on the 12(b)(6) motion, Judge Anello noted that the policy at issue did not define the term “contamination.” The court ruled that none of Starr’s cited cases finding an absence of coverage based on potential contamination were applicable, as they were decided on summary judgment motions (after the development of a factual record) as opposed to being based on the pleadings at issue in a 12(b)(6) motion.

The court considered the extent of the factual allegations set forth in the complaint, including: (1) that the FDA’s May 25, 2012 update advised that Molluscan shellfish harvested from Korean waters may have been exposed to human fecal waste and potentially contaminated with norovirus because of inadequate sanitation controls; (2) that the FDA recommended that all food distributors remove all processed Korean molluscan shellfish, including canned products as well as any product subsequently made with them; (3) that after it recalled the products from market, plaintiff received confirmation from the FDA that the agency agreed with the decision to recall, describing the recall as an alternative to FDA legal action to remove the plaintiff’s defective product from the market; and (4) that the FDA enforcement report noted that the reason for the recall was that product had been prepared, packed, or held under unsanitary conditions whereby it may have become contaminated with filth and rendered injurious to health.

As a result of its analysis of the allegations in the complaint, the court found that at the pleading stage of the litigation, the plaintiff’s factual allegations and the reasonable inferences drawn from those allegations were sufficient to allege the required elements to establish coverage under the policy, i.e., accidental or unintentional contamination which occurred as a result of production, preparation, processing, manufacture or distribution that could result in clear and identifiable internal or external symptoms. As a result of that conclusion, Judge Anello did not rule on the remaining question of whether plaintiff had stated a claim for breach of the policy’s government recall provision which Tri-Union alternatively argued provided coverage.