The Superior Court of New Jersey granted partial summary judgment in favor of franchisees of Taco Bell Restaurants against Underwriters of Lloyds, which sold Trade Name Restoration, Loss of Business Income, and Incident Response Insurance for Food Borne Illness (TNR) policies to the franchisees.

Invoking the policyholders’ reasonable expectations and noting that “any exclusion must be clear,” Hon. Judge Phillip Lewis Paley, JSC, found that an “aggregate supplier incident sublimit” cannot be used as a stealth exclusion to deny coverage for business income losses stemming from food contamination that was allegedly caused by lettuce that went into some Taco Bell menu items.

The opinion states that from 1999 through 2002, the Taco Bell franchisees purchased Food Borne Illness (FBI) insurance from the Lloyds Market. Beginning in 2003, when FBI coverage was discontinued, the franchisees instead bought TNR coverage from the Lloyds Market. The Court noted that the marketing for TNR insurance stated that “even the best restaurants can suddenly be trapped in an infectious health situation … due to a food borne illness or supplier mistake that ends up totally out of control.” At the same time, Lloyd’s asserted that the TNR policies contained an “Aggregate Supplier Incident Sublimit” not present in the FBI predecessor polices, indicating a dollar amount of $0.

When the franchisees suffered lost income stemming from the 2006 “Taco Bell Outbreak” of E. coli, allegedly traced to lettuce delivered to some northeastern Taco Bell franchises, Lloyds asserted that the $0 sublimit precludes insurance on account of any alleged involvement of a “supplier” and refused to cover the losses.

Noting the plaintiffs’ contention that “no one explained that that sublimit would exclude coverage previously provided under FBI insurance,” the Court asserted: “The Underwriters did not state what the sublimit meant; they did not communicate that it was an exclusion. The sublimit does not exclude coverage for the Outbreak.”

The decision also emphasized the apparent continuity between the FBI and TNR coverage that the franchisees purchased from Lloyd’s: “TNR insurance may differ from FBI insurance, but there is no evidence that the Franchisees were told that earlier coverage was being reduced … Plaintiffs reasonably believed that the Policy was tantamount to a ‘renewal’ of those issued earlier which would ‘mirror … the terms of the coverage … afforded in the past.”

The Court further found that the language describing the sublimit did not on its face apply to the particular occurrence, as the sublimit paragraph had undefined terms: “The Policy does not define ‘supplier,’ ‘supplier incident,’ ‘emanating from,’ ‘operations,’ ‘a product supplier of the insured,’ or ‘sublimit.’”

The Court’s opinion rejected several of the insurance company’s interpretations of policy language, including their argument that the lettuce was a “product,” to which the sublimit would apply, as opposed to “an ‘ingredient,’ something used to produce or prepare ‘the Insured’s Products.'”

“Restaurant owners buy TNR insurance expressly for protection against losses stemming from allegations of food contamination,” says William G. Passannante, lead counsel for the plaintiffs, who were comprised of more than 70 Taco Bell franchisees controlling more than 1,300 Taco Bell outlets. “Attempting after the fact to impose a sublimit of $0 on a type of occurrence not expressly excluded is nonsensical. The Court upheld the crucial insurance principles that exclusionary language in insurance policies must be clear, ambiguous language in insurance policies is interpreted reasonably in favor of the policyholder, and reductions in insurance coverage should be made clear to the policyholder. Reaffirming these rules helps solidify the value of insurance policies already paid for by policyholders with hard-earned dollars.”

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