1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT 10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 HOUSTON CASUALTY COMPANY Case No.: 19cv828-JO-AGS
13 Plaintiff, FINDINGS OF FACT AND 14 v. CONCLUSIONS OF LAW REGARDING PHASE I TRIAL 15 CIBUS US LLC, 16 Defendant. 17 18 19 20 21 22 I. INTRODUCTION 23 On May 3, 2019, Plaintiff Houston Casualty Company (“HCC”) filed this action to 24 dispute whether Defendant Cibus US LLC (“Cibus”) was entitled to coverage under its 25 Professional Liability Errors and Omissions policy (the “Policy”). HCC brought six 26 declaratory relief claims requesting a Court finding that Cibus was not entitled to insurance 27 coverage and seeking recoupment of the $2 million that HCC already paid under the Policy. 28 Dkt. 1. Cibus asserted counterclaims against HCC seeking a declaration of coverage and 1 alleging two additional claims for breach of contract and breach of the covenant of good 2 faith and fair dealing. Dkt. 10. 3 Prior to trial, the parties moved for summary judgment and to bifurcate the action. 4 On September 27, 2021, Judge Cynthia A. Bashant granted summary judgment dismissing 5 HCC’s first, third, and fifth declaratory relief claims. Judge Bashant also bifurcated the 6 trial into a Phase I, to try the declaratory judgment claims concerning coverage, and then a 7 Phase II, to try either HCC’s recoupment claim or Cibus’s counterclaims for breach of 8 contract and bad faith, depending on the outcome of Phase I.1 Beginning on September 26, 9 2022, the Court held the Phase I bench trial to try HCC’s three remaining claims for 10 declaratory relief: (1) its second claim based on “Prior Knowledge of Circumstances”; (2) 11 its fourth claim based on “Breach of Warranty Exclusion”; and (3) its sixth claim based on 12 “Retroactive Date [of the Policy].” 13 Throughout the course of the one-week bench trial, the Court heard testimony and 14 received numerous exhibits into the record. The Court heard live witness testimony from 15 Ms. Sarah Crabtree, Mr. Jerry Cass, Dr. Linda Hall, Dr. Peter Beetham, Dr. James Radtke, 16 Ms. Denise Schmidt, and Dr. David Sippell, and deposition testimony from Mr. Jeremy 17 Sulatyski, Ms. Schmidt, Mr. Thomas Harmeyer, Ms. Crabtree, and Dr. Radtke. Dkt. Nos. 18 147–150, 155, 161. The Court also received approximately sixty-one exhibits into the 19 evidentiary record. Dkts. 157, 162. Based on the totality of the evidence presented, the 20 Court makes the following findings of fact and conclusions of law with respect to HCC’s 21 second, fourth, and sixth claims for declaratory relief. 22 II. FINDINGS OF FACT 23 Overview 24 1. Cibus is a start-up company that designed, produced, and sold canola seeds intended 25 to be tolerant to sulfonylurea (“SU”), an herbicide popularly known as Draft. In 26 2015, Cibus developed two canola seeds, the Duo “C5507” and “C5522” hybrids, 27
28 1 which contained two copies of the SU tolerant gene. Around the same time that 2 Cibus tested and sold these Duo hybrids, Cibus also worked on developing a new 3 kind of canola seed containing four copies of the SU tolerant gene, referred to as the 4 “Quattro” hybrid. 5 2. On October 5, 2017, Cibus applied to HCC for professional liability insurance 6 coverage. Ex. DE. HCC issued a Professional Liability Errors and Omissions Policy 7 No. H717-110623 to Cibus for the period from November 1, 2017 to November 1, 8 2018, with a $2 million limit of liability. Ex. 1 (the “Policy”). 9 3. In February of 2018, Cibus decided to sell their Duo C5507 and C5522 canola seeds 10 to farmers in Canada and the United States. 11 4. During summer of 2018, Cibus received around thirty-five complaints, primarily 12 from farmers in Canada, complaining about the poor performance of the Duo C5507 13 and C5522 seeds. These farmers proceeded to make claims against Cibus for the 14 poor performance of these seeds. 15 5. While HCC paid these claims against Cibus up to the Policy limit of $2 million, it 16 reserved its right to dispute coverage and seek recoupment of these amounts. 17 The Policy 18 6. The language of the Policy provides that HCC “shall pay Loss and Claim 19 expenses . . . that an Insured shall become legally obligated to pay as a result of a 20 Claim made against an Insured for a Wrongful Act arising from Professional 21 Services” provided that “an Insured’s partners, principals, officers, directors, 22 members or risk managers had no knowledge of any circumstances, dispute, 23 situation, or incident that could reasonably have been expected to give rise to such 24 Claim prior to the Knowledge Date; and . . . the Wrongful Act takes place on or 25 after the Retroactive Date . . . and prior to the end of the Policy Period.” Policy 26 § I.(A). 27 7. The Policy defines a “Wrongful Act,” in relevant part, as “any actual or alleged 28 negligent act, error or omission committed or allegedly committed by any Insured 1 solely in connection with the rendering of Professional Services. For all purposes 2 under this Policy, the same Wrongful Act or any Interrelated Wrongful Acts shall be 3 deemed to have been committed at the time when the first such Wrongful Act was 4 Committed.” Policy § IV.(CC). The Policy defines “Interrelated Wrongful Acts” 5 as “all Wrongful Acts that have as a common nexus any fact, circumstance, situation, 6 event, transaction, cause or series of causally connected facts, circumstances, 7 situations, events, transactions, or causes.” 8 8. Pursuant to the Policy, the Knowledge Date is November 1, 2017. 9 9. Pursuant to the Policy, the Retroactive Date is November 1, 2016. 10 10. Pursuant to Endorsement 8 of the Policy, if the Wrongful Act occurred before 11 November 1, 2016, no coverage is afforded under the Policy; if the Wrongful Act 12 occurred between November 1, 2016 and November 1, 2017, the applicable Policy 13 limit is $1 million; and if the Wrongful Act occurred after November 1, 2017, the 14 applicable Policy limit is $2 million. 15 11. The Policy contains a “Breach of Warranty Exclusion,” which provides that the 16 Policy does not cover a Claim “based upon or arising out of breach of any warranty 17 or guaranty made by any Insured unless such liability would have attached to that 18 Insured even in the absence of such warranty or guaranty.” Policy § V.K. 19 Pre-2018 Performance of the Duo “C5507” and “C5522” Canola Seeds 20 12. In 2017, Cibus conducted a trial program of its newly developed Duo C5507 and 21 C5522 hybrids. Cibus provided free Duo hybrid seeds to over one hundred farmers 22 in Canada and the United States who agreed to try growing these seeds. During this 23 2017 trial program, Cibus received reports that many of the Canadian farmers who 24 had tried the Duo seeds observed a degree of phytotoxicity, harmful effects to a crop 25 from an herbicide, that resulted in reduced crop yields. These reports of reduced 26 crop performance in Canada contrasted with the positive performance of the C5507 27 hybrid in 2017 reported by farmers in the United States. Cibus received negative 28 1 feedback regarding 61% of acres grown by Canadian farmers, whereas the negative 2 feedback from United States farmers was only 4%. 3 13. After receiving the 2017 feedback from Canadian farmers who experienced poor 4 yields during the trial program, Cibus conducted an investigation. It discovered that 5 Canadian farmers applied the herbicide at a different rate and higher potency as 6 compared to the United States farmers. Cibus concluded that the crop injury these 7 Canadian farmers experienced was the result of improper application of Draft 8 herbicide and differences in agricultural practices. 9 14. In order to assist other farmers to avoid crop injury, Cibus developed a series of 10 detailed instructions on how and when to apply the herbicide to the C5507 and 11 C5522 crops to avoid crop damage.
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1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT 10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 HOUSTON CASUALTY COMPANY Case No.: 19cv828-JO-AGS
13 Plaintiff, FINDINGS OF FACT AND 14 v. CONCLUSIONS OF LAW REGARDING PHASE I TRIAL 15 CIBUS US LLC, 16 Defendant. 17 18 19 20 21 22 I. INTRODUCTION 23 On May 3, 2019, Plaintiff Houston Casualty Company (“HCC”) filed this action to 24 dispute whether Defendant Cibus US LLC (“Cibus”) was entitled to coverage under its 25 Professional Liability Errors and Omissions policy (the “Policy”). HCC brought six 26 declaratory relief claims requesting a Court finding that Cibus was not entitled to insurance 27 coverage and seeking recoupment of the $2 million that HCC already paid under the Policy. 28 Dkt. 1. Cibus asserted counterclaims against HCC seeking a declaration of coverage and 1 alleging two additional claims for breach of contract and breach of the covenant of good 2 faith and fair dealing. Dkt. 10. 3 Prior to trial, the parties moved for summary judgment and to bifurcate the action. 4 On September 27, 2021, Judge Cynthia A. Bashant granted summary judgment dismissing 5 HCC’s first, third, and fifth declaratory relief claims. Judge Bashant also bifurcated the 6 trial into a Phase I, to try the declaratory judgment claims concerning coverage, and then a 7 Phase II, to try either HCC’s recoupment claim or Cibus’s counterclaims for breach of 8 contract and bad faith, depending on the outcome of Phase I.1 Beginning on September 26, 9 2022, the Court held the Phase I bench trial to try HCC’s three remaining claims for 10 declaratory relief: (1) its second claim based on “Prior Knowledge of Circumstances”; (2) 11 its fourth claim based on “Breach of Warranty Exclusion”; and (3) its sixth claim based on 12 “Retroactive Date [of the Policy].” 13 Throughout the course of the one-week bench trial, the Court heard testimony and 14 received numerous exhibits into the record. The Court heard live witness testimony from 15 Ms. Sarah Crabtree, Mr. Jerry Cass, Dr. Linda Hall, Dr. Peter Beetham, Dr. James Radtke, 16 Ms. Denise Schmidt, and Dr. David Sippell, and deposition testimony from Mr. Jeremy 17 Sulatyski, Ms. Schmidt, Mr. Thomas Harmeyer, Ms. Crabtree, and Dr. Radtke. Dkt. Nos. 18 147–150, 155, 161. The Court also received approximately sixty-one exhibits into the 19 evidentiary record. Dkts. 157, 162. Based on the totality of the evidence presented, the 20 Court makes the following findings of fact and conclusions of law with respect to HCC’s 21 second, fourth, and sixth claims for declaratory relief. 22 II. FINDINGS OF FACT 23 Overview 24 1. Cibus is a start-up company that designed, produced, and sold canola seeds intended 25 to be tolerant to sulfonylurea (“SU”), an herbicide popularly known as Draft. In 26 2015, Cibus developed two canola seeds, the Duo “C5507” and “C5522” hybrids, 27
28 1 which contained two copies of the SU tolerant gene. Around the same time that 2 Cibus tested and sold these Duo hybrids, Cibus also worked on developing a new 3 kind of canola seed containing four copies of the SU tolerant gene, referred to as the 4 “Quattro” hybrid. 5 2. On October 5, 2017, Cibus applied to HCC for professional liability insurance 6 coverage. Ex. DE. HCC issued a Professional Liability Errors and Omissions Policy 7 No. H717-110623 to Cibus for the period from November 1, 2017 to November 1, 8 2018, with a $2 million limit of liability. Ex. 1 (the “Policy”). 9 3. In February of 2018, Cibus decided to sell their Duo C5507 and C5522 canola seeds 10 to farmers in Canada and the United States. 11 4. During summer of 2018, Cibus received around thirty-five complaints, primarily 12 from farmers in Canada, complaining about the poor performance of the Duo C5507 13 and C5522 seeds. These farmers proceeded to make claims against Cibus for the 14 poor performance of these seeds. 15 5. While HCC paid these claims against Cibus up to the Policy limit of $2 million, it 16 reserved its right to dispute coverage and seek recoupment of these amounts. 17 The Policy 18 6. The language of the Policy provides that HCC “shall pay Loss and Claim 19 expenses . . . that an Insured shall become legally obligated to pay as a result of a 20 Claim made against an Insured for a Wrongful Act arising from Professional 21 Services” provided that “an Insured’s partners, principals, officers, directors, 22 members or risk managers had no knowledge of any circumstances, dispute, 23 situation, or incident that could reasonably have been expected to give rise to such 24 Claim prior to the Knowledge Date; and . . . the Wrongful Act takes place on or 25 after the Retroactive Date . . . and prior to the end of the Policy Period.” Policy 26 § I.(A). 27 7. The Policy defines a “Wrongful Act,” in relevant part, as “any actual or alleged 28 negligent act, error or omission committed or allegedly committed by any Insured 1 solely in connection with the rendering of Professional Services. For all purposes 2 under this Policy, the same Wrongful Act or any Interrelated Wrongful Acts shall be 3 deemed to have been committed at the time when the first such Wrongful Act was 4 Committed.” Policy § IV.(CC). The Policy defines “Interrelated Wrongful Acts” 5 as “all Wrongful Acts that have as a common nexus any fact, circumstance, situation, 6 event, transaction, cause or series of causally connected facts, circumstances, 7 situations, events, transactions, or causes.” 8 8. Pursuant to the Policy, the Knowledge Date is November 1, 2017. 9 9. Pursuant to the Policy, the Retroactive Date is November 1, 2016. 10 10. Pursuant to Endorsement 8 of the Policy, if the Wrongful Act occurred before 11 November 1, 2016, no coverage is afforded under the Policy; if the Wrongful Act 12 occurred between November 1, 2016 and November 1, 2017, the applicable Policy 13 limit is $1 million; and if the Wrongful Act occurred after November 1, 2017, the 14 applicable Policy limit is $2 million. 15 11. The Policy contains a “Breach of Warranty Exclusion,” which provides that the 16 Policy does not cover a Claim “based upon or arising out of breach of any warranty 17 or guaranty made by any Insured unless such liability would have attached to that 18 Insured even in the absence of such warranty or guaranty.” Policy § V.K. 19 Pre-2018 Performance of the Duo “C5507” and “C5522” Canola Seeds 20 12. In 2017, Cibus conducted a trial program of its newly developed Duo C5507 and 21 C5522 hybrids. Cibus provided free Duo hybrid seeds to over one hundred farmers 22 in Canada and the United States who agreed to try growing these seeds. During this 23 2017 trial program, Cibus received reports that many of the Canadian farmers who 24 had tried the Duo seeds observed a degree of phytotoxicity, harmful effects to a crop 25 from an herbicide, that resulted in reduced crop yields. These reports of reduced 26 crop performance in Canada contrasted with the positive performance of the C5507 27 hybrid in 2017 reported by farmers in the United States. Cibus received negative 28 1 feedback regarding 61% of acres grown by Canadian farmers, whereas the negative 2 feedback from United States farmers was only 4%. 3 13. After receiving the 2017 feedback from Canadian farmers who experienced poor 4 yields during the trial program, Cibus conducted an investigation. It discovered that 5 Canadian farmers applied the herbicide at a different rate and higher potency as 6 compared to the United States farmers. Cibus concluded that the crop injury these 7 Canadian farmers experienced was the result of improper application of Draft 8 herbicide and differences in agricultural practices. 9 14. In order to assist other farmers to avoid crop injury, Cibus developed a series of 10 detailed instructions on how and when to apply the herbicide to the C5507 and 11 C5522 crops to avoid crop damage. Cibus called this hands-on instructional 12 program the “White Glove program.” Through this program, Cibus employees 13 worked directly with farmers in 2018 regarding correct herbicide application 14 procedures. 15 15. In addition to the above free seed trial program, Cibus further tested the 16 performance of its Duo products on small plots of land in Canada in 2016 and 2017. 17 Cibus referred to these trials as the “small-plot herbicide spray trials.” See Exs. 7, 18 8, 9 (charts showing aggregated data from 2016 and 2017 small-plot herbicide spray 19 trials). 20 16. The Court finds that testing data from the 2016 and 2017 small-plot herbicide spray 21 trials showed phytotoxicity scores in excess of 10% for the Duo C5507 and C5522 22 hybrids. See Exs. 7, 8, 9. This testing data also showed that while the Duo hybrids 23 initially had higher phytotoxicity and lower yield performance at the start of the 24 growing season, the yield performance leveled out to commercially acceptable levels 25 by the end of the growing season. See id. 26 17. In 2017, Cibus’s sales teams also conducted commercial strip trials in the United 27 States comparing end of season yields for the Duo C5507 and C5522 hybrids, the 28 Quattro hybrid, and other competitive hybrids on the market. See Ex. 13-2 1 (compilation of 2017 strip trial results in North Dakota). Compared to the small- 2 plot herbicide spray trials, these strip trials were larger-scale field trials conducted 3 on significantly larger plots of land. 4 18. The Court finds that the strip trials in 2017 for commercial purposes showed that 5 the yield performance of the Duo C5507 and C5522 hybrids performed well and 6 produced crop yield roughly equivalent to that of the Quattro hybrid and other 7 leading competitive hybrids on the market. See Exs. 13-2, HP. 8 Expert Testimony on Duo C5507 and C5522 Performance 9 19. Dr. Linda Hall, HCC’s expert on weed science, plant physiology, and gene-flow, 10 testified about the phytotoxicity of the Duo C5507 and C5522 hybrids. She 11 explained that the Canadian standard for maximum acceptable phytotoxicity is 10% 12 and testified that the small-plot trials for the Duo C5507 and C5522 hybrids revealed 13 phytotoxicity scores in excess of that standard. She further testified that 14 phytotoxicity scores are significant because of what they forecast about crop yield— 15 higher phytotoxicity scores are associated with lower crop performance. In 16 comparison, Dr. Hall testified that the testing data of the Quattro hybrids in 17 development by Cibus showed phytotoxicity scores to be within or close to the 10% 18 standard. 19 20. She opined based on 2017 phytotoxicity data from the small-plot spray trials that 20 the C5507 and C5522 crop injury and yield losses in 2017 stemmed from their lack 21 of herbicide tolerance from having only two copies of the resistant gene, whereas 22 the Quattro hybrids had higher herbicide tolerance due to having four copies of the 23 resistant gene. Dr. Hall opined that, based on this phytotoxicity data and related 24 summary reports and presentations, Cibus should reasonably have known in 2017 25 that the Duo hybrids were not sufficiently herbicide tolerant and therefore would not 26 perform well. In forming her expert opinion, Dr. Hall did not consider the 2017 strip 27 trial data from the United States, which reflected field performance from 28 significantly larger plots of land compared to the smaller plot spray trials on only 1 around two by ten meters. She also did not consider the positive feedback received 2 from United States farmers who participated in the trial program. 3 21. Dr. James Radtke provided both fact and expert testimony for Cibus as the senior 4 VP of product development and an expert in plant breeding and genetics. Dr. Radtke 5 agreed with Dr. Hall that the small-plot spray trial data from 2016 and 2017 of the 6 C5507 and C5522 hybrids showed phytotoxicity levels in excess of 10%. He pointed 7 out, however, that the initial high phytotoxicity and low yield performance 8 eventually leveled out to commercially acceptable yield levels by the end of the 9 growing season. See Exs. 7, 8, 9. 10 22. Dr. Radtke testified that, in 2017, Cibus viewed the higher phytotoxicity scores of 11 the Duo C5507 and C5522 hybrids to be acceptable because of the positive yield 12 performance of these seeds. He testified that yield is the most important factor to a 13 farmer and the main metric to gauge the performance of a hybrid seed like the Duo 14 C5507 and C5522 hybrids. 15 23. Based on the totality of the information that Cibus had in 2017 from (1) 16 participating farmers in the free seed trial program, (2) the small-plot spray trials, 17 and (3) the large-scale strip trials in the United States that showed these Duo hybrid 18 seeds were comparable to the Quattro hybrid and other competitive hybrids on the 19 market, Dr. Radtke testified that it was reasonable for Cibus to conclude it could 20 confidently move forward with the Duo hybrids as a commercially viable product. 21 24. Dr. Radtke also opined that, based on the information Cibus gathered from the 2017 22 free seed trial program, it was reasonable for Cibus to believe the adjustments made 23 through the White Glove program would help solve the crop injury problems 24 experienced by some of these farmers. 25 25. The Court finds Dr. Radtke’s testimony that Cibus did not have reason to know that 26 its seeds would fail in 2018 to be credible and supported by the weight of the 27 evidence. While the Court finds Dr. Hall to be a highly qualified expert, the Court 28 affords her opinion less weight because she based her opinion only on limited small- 1 plot trial data and phytotoxicity levels rather than the entirety of available 2 information regarding yield performance. The Court finds Dr. Radtke’s opinions 3 based on the totality of pre-2018 yield performance data to be more credible and 4 reliable. 5 26. The Court also finds credible Dr. Radtke’s testimony that yield is the most 6 important metric for seed performance; this opinion was supported by Dr. Hall’s 7 testimony that phytotoxicity matters because of its impact on yield. 8 27. Based on Dr. Radtke’s testimony and the Court’s own factual assessment of the 9 evidence in the record, the Court finds that it was reasonable for Cibus to conclude 10 that its Duo C5507 and C5522 hybrid canola seeds were a viable commercial product 11 for the 2018 growing season. The Court finds that Cibus did not have reason to 12 believe otherwise. 13 Decision to Sell Duo C5507 and C5522 for the 2018 Growing Season 14 28. The Court finds credible Dr. David Sippell’s testimony that after collecting and 15 evaluating testing data from the 2017 strip trials, Cibus made the final decision to 16 sell the C5507 and C5522 hybrid seeds to farmers for the 2018 growing season in 17 February 2018. 18 29. The Court finds credible Dr. Sippell’s testimony that Cibus could not make its final 19 decision to sell the C5507 and C5522 hybrid seeds for the 2018 growing season until 20 February 2018 because Cibus needed to know how much and what quality of seed 21 was available and to wait to finalize contracts with third-party grain purchasers. 22 30. Dr. Peter Beetham also testified that Cibus was new to the Canadian market in 2017 23 and still trying to develop relationships with farmers; selling bad seeds resulting in 24 crop injury would severely impact Cibus’s ability to expand in an industry that is 25 largely relationship-based. The Court finds Dr. Beetham to be credible. The Court 26 also finds credible Dr. Radtke’s testimony that Cibus would not have distributed the 27 Duo C5507 and C5522 hybrids to farmers if it thought the seeds would not produce 28 1 because selling bad seeds is simply not good for the reputation and business of a 2 newcomer to this field. 3 2018 Canola Claims 4 31. In August 2018, Cibus received claim notices from farmers who purchased the Duo 5 C5507 and C5522 hybrid seeds seeking monetary damages for injury to their crops 6 and low yield. Cibus received around thirty-five claims in total with similar 7 allegations (the “2018 Canola Claims”). 8 32. The claim forms submitted by these farmers sought monetary compensation 9 regarding “the non-performance” of the Cibus canola and a “substantial yield loss 10 resulting in reduced per acre return and significant loss of revenue per acre.” 11 Ex. DC. 12 33. Ms. Sarah Crabtree also testified that farmers made claims to Cibus seeking 13 monetary damages for crop injury and low yield in 2018. She further testified that 14 farmers complained that Cibus gave them ineffective growing advice during the 15 growing season. 16 34. Cibus sought coverage under the Policy for the 2018 Canola Claims from the 17 farmers who bought their seeds. HCC agreed to defend Cibus in connection with 18 the 2018 Canola Claims, subject to a full reservation of rights. 19 Warranties 20 35. Ms. Denise Schmidt testified that Cibus had an established policy to not make any 21 express warranties or representations to farmers as to the performance of a seed 22 hybrid, the degree of phytotoxicity when sprayed with Draft herbicide, or the yield 23 that would be produced. The Court finds Ms. Schmidt’s testimony to be credible. 24 36. Ms. Schmidt further testified that Cibus sales employees made marketing 25 statements to farmers consistent with the following: 26 a. The SU canola is non-GMO. 27 b. If the Draft herbicide is applied properly, the SU canola is tolerant. 28 c. The SU canola will help increase a return on investment and profitability. 1 37. These marketing statements made by the sales employees did not include 2 representations about performance and yield. 3 38. The Court also finds credible Ms. Schmidt’s testimony that this policy of not 4 making warranties about seed performance is standard in the seedsman industry 5 because so many unexpected factors are at play. 6 39. Based on Ms. Schmidt’s testimony, the Court finds that Cibus had a policy, 7 consistent with industry standard, to not make any express warranties or 8 representations to farmers about the performance of a seed hybrid or the degree of 9 phytotoxicity. 10 40. Dr. Sippell testified that Cibus regularly trained its sales staff to not promise yield 11 levels or phytotoxicity levels of the seed, as part of the industry standard. Dr. Sippell 12 further testified that Cibus, consistent with industry standards, made only a few 13 warranties regarding the C5507 and C5522 hybrids. Cibus’s warranties (1) 14 addressed hybridity and germination levels; (2) promised that the bag contained the 15 correct seed as labeled; and (3) disclaimed other warranties. Cibus printed these 16 standard warranties, including the disclaimer, on the bag itself. The Court finds 17 Dr. Sippell’s testimony to be credible. 18 41. Ms. Crabtree further testified that no farmers made a claim for breach of warranty. 19 The Court finds Ms. Crabtree’s testimony to be credible in this regard. 20 42. The law firm Thompson Dorfman Sweatman LLP representing the parties during 21 the Cibus claims process issued a report to HCC describing Cibus’s exposure to 22 liability for the 2018 Canola Claims. This report concluded that Cibus may be liable 23 for the breach of two statutorily implied warranties under the laws of Manitoba and 24 Saskatchewan. Ex. 28. 25 /// 26 /// 27 /// 28 1 III. CONCLUSIONS OF LAW 2 Jurisdiction 3 43. HCC is a citizen of Texas and Cibus is a citizen of another state.2 The amount in 4 controversy exceeds the sum of $75,000, exclusive of interests and costs. Because 5 there is complete diversity between the parties and the amount in controversy 6 exceeds the sum of $75,000, the Court has jurisdiction over this action. 28 U.S.C. 7 § 1332. 8 Venue 9 44. Venue is proper in this Court under 28 U.S.C. § 1391(a)(1) because the sole 10 defendant resides in this District. Venue is also proper pursuant to 28 U.S.C. 11 § 1391(a)(2) because a substantial part of the events or omissions giving rise to the 12 claims at issue occurred in this District. 13 Law Governing Construction of Insurance Contracts 14 45. As the party asserting claims for declaratory relief, HCC has the burden of proving 15 every essential element of those claims. Dir., Office of Workers’ Comp. Programs, 16 Dept. of Labor v. Greenwich Collieries, 512 U.S. 267, 275 (1994). As the insurance 17 company, HCC also has the burden of proving any applicable exclusions from 18 coverage. Unified Western Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 19 1111 (9th Cir. 2006). 20 46. California law governs the Policy. Intri-Plex Techs., Inc. v. Crest Group, Inc., 499 21 F.3d 1048, 1052 (9th Cir. 2007). Insurance policies are contracts governed in part 22 by ordinary rules of contractual interpretation, but with special protections for 23 policyholders. MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003). While 24 the insured has the burden to establish that a claim is within the basic scope of 25 coverage, clauses in the insurance contract granting coverage are construed broadly 26 whereas exclusions must be “interpreted narrowly against the insurer.” Id. 27
28 2 While it is disputed whether Cibus is a citizen of California, Delaware, or the British Virgin Islands, both parties agree that 1 Exclusionary language is held to the highest standard of scrutiny, and must be 2 “conspicuous, plain, and clear.” Id. (quoting State Farm Mut. Auto Ins. Co. v. 3 Jacober, 10 Cal. 3d 193, 201–02 (1973)). 4 A. HCC’s Sixth Claim for Relief 5 47. The Court first addresses HCC’s Sixth Claim for Relief seeking a judicial 6 declaration that Cibus is not entitled to coverage because its “Wrongful Act” as 7 defined by the Policy occurred before the Retroactive Date. 8 48. To prevail on its Sixth Claim for Relief, HCC must prove by a preponderance of 9 the evidence that 10 a. The Canola Claims were written demands for monetary damages or non- 11 monetary relief made against Cibus, or any other Insured; 12 b. For an actual or alleged negligent act, error, or omission committed by Cibus 13 in connection with the rendering of Professional Services; 14 c. That took place before November 1, 2016, rendering Cibus ineligible for 15 coverage, or in the alternative, took place between November 1, 2016 and 16 November 1, 2017, rendering Cibus eligible for only $1 million in coverage. 17 49. There was no dispute at trial that the 2018 Canola Claims constituted written 18 demands as required by the Policy. What the parties dispute is the nature of the 19 “Wrongful Act” and when it occurred. HCC contended at trial that the Wrongful 20 Act was the poor design of the Duo hybrid seeds with only two copies of the tolerant 21 gene such that they were not sufficiently tolerant to Draft herbicide. HCC further 22 argued that because Cibus designed this seed in 2015, the Wrongful Act took place 23 prior to November 2016 and was therefore not covered by the Policy. 24 50. The Court disagrees. The Policy provides that HCC “shall pay Loss and Claim 25 expenses . . . that an Insured shall become legally obligated to pay as a result of a 26 Claim made against an Insured for a Wrongful Act arising from Professional 27 Services.” The Wrongful Act, in turn, is defined as “any actual or alleged negligent 28 act, error or omission committed or allegedly committed by any Insured solely in 1 connection with the rendering of Professional Services.” Based on the plain 2 language of the Policy, the Wrongful Act is the actual or alleged “negligent act, 3 error, or omission” that forms the basis of the farmers’ claims against Cibus. In this 4 case, the farmers made claims against Cibus for the poor performance of its seeds in 5 2018 and sought “compensation regarding the non-performance of [their] Cibus 6 canola in the growing season of 2018.” Ex. DC. Ms. Crabtree, HCC’s claims 7 handler, testified that she received complaints from the farmers about the seed’s low 8 crop yield and ineffective growing advice from Cibus. Essentially, the farmers 9 complained that Cibus sold them poor performing C5507 and C5522 seeds in 2018 10 for the 2018 growing season, not for Cibus’s poor design of those seeds back in 11 2015. 12 51. Based on the above, the Court finds that the Wrongful Act as defined by the 13 Policy—that is, the actual or alleged negligent act, error, or omission committed by 14 Cibus that instigated the farmers’ claims—was its decision to sell the Duo C5507 15 and C5522 seeds for the 2018 growing season. Consequently, all subsequent related 16 actions to effect the sale of these seeds in 2018 are Interrelated Wrongful Acts. 17 52. Because Cibus made the decision to sell the C5507 and C5522 seeds to farmers for 18 the 2018 growing season in February 2018, the Court finds that the Wrongful Act 19 thus occurred in February 2018, after the Retroactive Date. 20 53. Based on the evidence presented, the Court finds that HCC has not proved by a 21 preponderance of the evidence that Cibus’s decision to sell the C5507 and C5522 22 seeds for the 2018 growing season took place before November 1, 2016, or in the 23 alternative, took place between November 1, 2016 and November 1, 2017. 24 54. HCC’s sixth claim for declaratory relief based on its argument that the Wrongful 25 Act occurred prior to the Retroactive Date of the Policy is therefore DENIED. 26 B. HCC’s Second Claim for Relief 27 55. The Court next addresses HCC’s Second Claim for Relief seeking a judicial 28 declaration that Cibus is not entitled to coverage for the 2018 Canola Claims because 1 Cibus should have reasonably expected the Duo C5507 and C5522 hybrid crop 2 failures in 2018 prior to the Policy’s November 1, 2017 Knowledge Date. 3 56. The Policy excludes coverage for claims where “an Insured’s partners, principals, 4 officers, directors, members or risk managers had no knowledge of any 5 circumstances, dispute, situation or incident that could reasonably have been 6 expected to give rise to such Claim” prior to November 1, 2017. Ex. 1 at 1, 14. 7 57. Therefore, to prevail on its Second Claim for Relief, HCC must prove by a 8 preponderance of the evidence that 9 a. Cibus’s partners, principals, officers, directors, members, or risk managers 10 had knowledge of any circumstances, dispute, situation, or incident; 11 b. That could reasonably have been expected to give rise to the 2018 Canola 12 Claims; 13 c. Prior to the Policy’s November 1, 2017 Knowledge Date. 14 58. In this case, the poor performance of the Duo C5507 and C5522 hybrids in the 2018 15 growing season gave rise to the 2018 Canola Claims. The Court therefore examines 16 whether Cibus could have reasonably expected the crop failures of 2018 based on 17 the information available to it. 18 59. Cibus’s 2016 and 2017 testing data from the Canadian small-plot trials indicated 19 that the Duo C5507 and C5522 hybrids initially showed phytotoxic effects but over 20 the growing season produced commercially acceptable yields. Cibus’s 2017 21 commercial strip data from the United States indicated that the yield performance of 22 the Duo hybrids was comparable to the Quattro hybrid and other competitive hybrids 23 on the market. Feedback from United States and Canadian farmers during the 2017 24 free seed trial program revealed significantly better performance in the United States 25 compared to Canada and differences in U.S. and Canadian herbicide application 26 practices; this indicated to Cibus that a variation in cultural farming practices 27 contributed to the poor crop results in Canada. 28 1 60. Based on the information available to Cibus, it was reasonable for Cibus to 2 conclude that the Duo C5507 and C5522 hybrids would have acceptable yield 3 performance in the 2018 growing season, especially in conjunction with the 4 precautions and adjustments implemented through the White Glove program. 5 61. The Court therefore concludes that no Cibus partner, principal, officer, director, 6 member, or risk manager could have reasonably expected, prior to November 1, 7 2017, the farmers’ claims of crop injury and low yield in 2018. Accordingly, the 8 Court concludes that the Policy’s prior knowledge provision does not bar coverage 9 for the 2018 Canola Claims. 10 62. HCC’s second claim for declaratory relief based on the Policy’s prior knowledge 11 provision is therefore DENIED. 12 C. HCC’s Fourth Claim for Relief 13 63. Finally, the Court addresses HCC’s Fourth Claim for Relief seeking a judicial 14 declaration that the Policy’s Breach of Warranty Exclusion precludes coverage for 15 the 2018 Canola Claims. 16 64. The Policy excludes coverage for Claims “based upon or arising out of breach of 17 any warranty or guaranty made by any Insured unless such liability would have 18 attached to that Insured even in the absence of such warranty or guaranty.” Ex. 1 19 at 27. 20 65. To prevail on its Fourth Claim for Relief, HCC must prove by a preponderance of 21 the evidence that 22 a. The Canola Claims are based upon or arise out of a breach of warranty or 23 guaranty made by Cibus; and 24 b. Such liability would not have attached to Cibus in the absence of such 25 warranty or guaranty. 26 66. The Court concludes that the Policy’s Breach of Warranty Exclusion does not 27 preclude coverage because (1) the breach of an explicit warranty is not the basis of 28 1 the 2018 Canola Claims and (2) an implied warranty is not a warranty “made by the 2 Insured” as required by the plain language of the Policy’s exclusionary language. 3 67. The Court concludes that the 2018 Canola Claims did not stem from a breach of 4 warranty for the following reasons. First, pursuant to Cibus’s policy—consistent 5 with standard practice in the seedsman industry—Cibus employees did not make 6 warranties to the farmers about seed performance and yield. Second, the claim forms 7 submitted by the farmers complained of “substantial yield loss resulting in reduced 8 per / acre return and significant loss of revenue per acre” but make no mention of 9 breach of warranty. Ms. Crabtree, the claims handler for HCC who responded to 10 these claims, testified that farmers complained to her about the poor performance of 11 the seeds and Cibus’s ineffective growing advice, but made no mention of a breach 12 of warranty. 13 68. In short, Cibus did not make express warranties about its seed performance and 14 yield. Nor did any farmers complain or make claims based on the violation of any 15 express warranties. Because the 2018 Canola Claims are not based on a breach of 16 express warranty or guaranty made by Cibus, the exclusion set forth above does not 17 apply. 18 69. Moreover, HCC argues that Cibus’s breach of implied warranties subjected it to 19 liability for the farmers’ 2018 Canola Claims. The Court concludes that to the extent 20 Cibus faced liability for breach of a statutorily implied warranty, such warranty arose 21 by operation of law rather than being “made by the Insured” within the plain 22 meaning of the Policy’s breach of warranty exclusion. 23 70. The Court finds that even in the absence of such express warranty or guaranty, 24 potential liability against Cibus could have been based on implied statutory 25 warranties. 26 71. Based on the evidence presented, the Court finds HCC has not proved by a 27 preponderance of the evidence that the 2018 Canola Claims by the farmers are based 28 upon or arise out of a breach of warranty or guaranty made by Cibus and that such 1 liability would not have attached to Cibus in the absence of such warranty or 2 guaranty. Accordingly, the Policy’s Breach of Warranty exclusion does not bar 3 coverage for the 2018 Canola Claims. 4 72. HCC’s fourth claim for declaratory relief based on the Policy’s Breach of Warranty 5 exclusion is therefore DENIED. 6 IV. CONCLUSION 7 Based on the above, the Court denies HCC’s claims for declaratory relief set forth 8 Counts Two, Four, and Six of its Complaint. Accordingly, the Court finds that coverage 9 || for the 2018 Canola Claims is afforded under the Policy. 10 IT IS SO ORDERED. 11 12 Dated: December 19, 2022 13 14 Ho orgbfe Tinsook Ohta 15 United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28 17