Virginia Federal Court Orders Suppliers of Contaminated Fruit to Reimburse Subrogated Insurer for Defense of Smoothie Cafes

Sentinel Insurance Co. v. VLM Foods Inc. arose after a hepatitis A outbreak was traced back to contaminated strawberries used and sold by several insured smoothie cafe franchises. The insured tendered all of the outbreak claims to its strawberry suppliers, pursuant to several hold harmless agreements. Although the suppliers paid a bulk of the claims, they refused to pay any of the insured’s attorneys’ fees and costs incurred in defending the outbreak claims, which were ultimately covered by the insurer. This litigation is a result of the insurer’s effort to recover those costs.

The insurer argued that it was entitled to recover those costs because it stood in the shoes of its insured as to the underlying hold harmless agreements entered into by the insured’s suppliers and that it was also entitled to the same indemnification protections. The crux of whether the insurer could take advantage of the indemnification protections in the hold harmless agreements turned on whether the insured was a customer under those agreements. The court found that the insured was “clearly” a customer under those agreements, which were valid and applicable, thereby entitling the insurer to reimbursement. Specifically, the court rejected a “form over function” argument advanced by the suppliers to show that the insured was not a customer under the agreements. Instead, the court relied on the plain meaning of the word “customer” to find that the indemnity provisions at issue were unambiguous.

Relatedly, the suppliers’ voluntary payments argument proved unsuccessful. The suppliers argued that because the insurer voluntarily dismissed a previous action against the insured to rescind the policy and recoup costs against the insured, the subsequent payments were considered voluntary payments. The court disagreed and found that the insurer was obligated to defend the insured under the policy given the duty to defend, and thus the voluntary payment doctrine did not bar its recovery of the fees and costs.

The court’s opinion also rejected several other arguments advanced by the suppliers to try to avoid liability, ranging from arguments that the provisions were invalid for lack of mutuality, to arguments that there was no breach because the offending produce could not be traced specifically. At bottom, the court agreed with the insurer that it was entitled to step into the shoes of its insured and take advantage of the indemnification provisions.