Coverage for Claims Against Seed Grower Not Barred by Prior Knowledge or Retroactive Date Provisions
The United States District Court for the Southern District of California, applying California law, denied an insurer’s claims for declaratory relief following a week-long bench trial to resolve coverage under a professional liability policy for claims against a canola seed start-up company. Houston Casualty Co. v. Cibus US LLC, 2022 WL 17760342 (S.D. Cal. Dec. 19, 2022). The court held that coverage was not barred by a retroactive date provision, a prior knowledge provision, or a breach of warranty exclusion.
The insured, a canola seed grower, was sued by farmers complaining about the poor performance of the canola seeds. Prior to the sale of the seeds, the insured had conducted several trial programs as to the seeds’ ability to tolerate herbicides. The trials had mixed results but ultimately showed that the seeds produced commercially acceptable yields. After paying claims up to the policy limit, the insured’s professional liability insurer brought a coverage action seeking a determination of coverage.
After a week-long bench trial, the coverage court issued an opinion with findings of fact and decided the three coverage issues. First, the court considered the policy’s retroactive date provision, which required the “wrongful act” at issue to take place after the retroactive date. The insurer argued that the “wrongful act” was the poor design of the canola seeds, which occurred years before the retroactive date. The court disagreed, holding that the act that “instigated the farmers’ claims” was the decision to sell the seeds during the growing season after the policy’s retroactive date, leading to poor crop performance.
Next, the court considered the policy’s prior knowledge provision, which required that the insured have “no knowledge of any circumstances . . . that could reasonably have been expected to give rise to such Claim” prior to the inception date of the policy. While the insurer argued that the studies performed by the insured gave it prior knowledge that the crops would perform poorly after sale, the court held that the studies showed that the growing season ultimately produced commercially acceptable yields. Thus, the insured reasonably concluded that the seeds would produce an acceptable yield when sold.
Finally, the court held that a breach of warranty exclusion did not bar coverage for the claims. The exclusion barred coverage for claims “based upon or arising out of breach of any warranty or guaranty made by any Insured unless such liability would have attached to that Insured even in the absence of such warranty or guaranty.” The court held that the claims did not stem from an explicit warranty made by the insured to the farmers about yield, and any implied warranty was not a warranty “made by the Insured.”