Shade Foods v. Innovative Prod. Sales

• Decision Date: 28 February 2000
• Docket Number: No. A080316.,A080316.
• Citation: 78 Cal.App.4th 847,93 Cal.Rptr.2d 364
• Court: California Court of Appeals Court of Appeals
• Parties: SHADE FOODS, INC., Plaintiff and Appellant, v. INNOVATIVE PRODUCTS SALES & MARKETING, INC., Defendant, Cross-complainant and Appellant; Royal Insurance Company of America, Defendant and Appellant; Northbrook National Insurance Company, Defendant, Cross-defendant and Appellant.

93 Cal.Rptr.2d 364

78 Cal.App.4th 847

SHADE FOODS, INC., Plaintiff and Appellant, v. INNOVATIVE PRODUCTS SALES & MARKETING, INC., Defendant, Cross-complainant and Appellant Royal Insurance Company of America, Defendant and Appellant Northbrook National Insurance Company, Defendant, Cross-defendant and Appellant.

No. A080316.

Court of Appeal, First District, Division 1.

February 28, 2000.

As Modified on Denial of Rehearing March 29, 2000.

Joseph A. Hearst, Esq., Berkeley, Pillsbury, Madison & Sutro LLP, Reginald D. Steer, Esq., For Plaintiff and Appellant Shade Foods, Inc.

Emerich, Pedreira & Fike, David A. Fike, Esq., Fresno, For Defendant, Cross-complainant and Appellant Innovative Products Sales & Marketing, Inc.

Musick, Peeler & Garrett LLP, David A. Tartaglio, Cheryl A. Orr, Esq., Los Angeles; Lynch, Gilardi & Grummer, Richard S. Gilardi, Esq., San Francisco, Susan M. Carbone; Stephan, Oringher, Richman & Theodora, Ginsburg, Stephan, Oringher & Richman, P.C., Harry W. R. Chamberlain II, Esq., Los Angeles, and Robert M. Dato, For Defendant and Appellant Royal Insurance Company of America.

Ropers, Majeski, Kohn & Bentley, Susan H. Handelman, Esq., Redwood City, For Defendant, Cross-defendant and Appellant Northbrook National Insurance Company.

SWAGER, J.

Two insurance carriers, Northbrook National Insurance Company (Northbrook) and Royal Insurance Company of America (Royal) appeal from a judgment awarding compensatory and punitive damages to two insureds, Innovative Products Sales & Marketing, Inc. (IPS) and Shade Foods, Inc. (Shade). We reverse the judgments for punitive damages and modify a portion of the judgment pursuant to the other-insurance clause in the policies but otherwise affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Shade is a wholesale food manufacturer that makes ingredients for larger food-product companies. According to Shade's Senior Vice-president, General Mills is "by far" its largest customer and accounts for a "very large percentage" of its total sales. In cooperation with General Mills, Shade developed a process for manufacturing nut clusters composed mainly of diced almonds and congealed syrup with small portions of walnuts and pecans. Shade began manufacturing this product at a plant in Kansas in the late 1980's for use in a General Mills breakfast cereal called "Clusters." In 1993 and 1994, it sold about $12 million of the product to General Mills under a standard purchase order.

Shade initially purchased processed almonds from various suppliers in California for manufacture of nut clusters. In 1992 and 1993, Skip Petitt, an almond processor in Madera, California, made a bid for this business by forming IPS and installing equipment in his plant for roasting and dicing almonds to the specifications required for the product. Shade ultimately entered into an agreement with IPS for the supply of processed almonds during a three-year period beginning in October 1993. During the first months of the agreement, Shade ordered a relatively modest supply of almonds, but it began increasing its orders in 1994 and purchased its entire supply of almonds from IPS in March 1994.

In 1994, Shade was insured by a commercial general liability policy issued by Royal with limits of $2 million per Occurrence. IPS was insured by a package policy issued by Northbrook that provided general liability coverage with a $1 million limit per occurrence and property coverage for "stock" with a $3 million limit. The Northbrook liability insurance policy contained a vendor's endorsement that named Shade as an additional insured.

On April 5, 1994, General Mills notified Shade that wood had been found in the nut clusters used in its boxed cereals. Shade itself did not use wood in proximity to the facilities used to manufacture the product and suspected that the processed almonds supplied by IPS were the source of the problem. Upon manually inspecting 80,000 pounds of diced almonds from IPS, it found 295 pieces of wood splinters, weighing about a quarter of a pound. Many of the pieces were potentially injurious to consumers, being sharply pointed and one-fourth inch to two or three inches long. Shade identified a possible source of the contamination in a "bin lifter" at the IPS plant which dumped loads of almonds on wooden pallets into a hopper that fed a conveyor belt.

General Mills shut down its production of Clusters cereal, shipped its supply of nut clusters back to Shade, and destroyed its entire stock of contaminated boxes of cereal. Shade was unable to find any use for the contaminated nut clusters, but it was able to mitigate its losses on its stock of diced almonds by grinding the almonds into powder and selling them as almond paste. General Mills presented Shade with a claim that was ultimately reduced to the precise figure of $1,347,932.20. About $1 million of this sum represented the value of cereal it was compelled to destroy.

Upon learning of the wood contamination, both IPS and Shade promptly submitted claims to Northbrook and Royal, respectively. Royal appointed counsel to represent Shade and issued a coverage letter dated October 12, 1994, that appeared to offer coverage of $1 million, but, three months later, it informed Shade that it would pay for only 5 or 10 percent of the General Mills claim, or at most $150,000, representing its estimate of Shade's potential exposure to liability to General Mills. Northbrook denied liability insurance coverage in separate letters to IPS and Shade dated July 5, 1994, and August 5, 1994, respectively. Though it never reconsidered its denial of coverage to IPS, Northbrook entered into negotiations with Shade for a period of months and made a highly conditional offer of $1 million in settlement of the General Mills claim in June of 1995. Meanwhile, Shade paid the full amount of the General Mills claim and calculated that its total losses caused by the wood contamination amounted to $2,454,557.70.

On June 1, 1995, Shade brought an action for damages against IPS, Northbrook and Royal. The complaint alleged causes of action for negligence, breach of contract and breach of warranty against IPS and stated claims for breach of contract and breach of the implied covenant of good faith and fair dealing against the insurers.

With respect to Northbrook, Shade alleged rights as a third-party beneficiary of its insurance policy with IPS. IPS subsequently filed a cross-complaint against Northbrook, alleging breach of contract and breach of the implied covenant. Both the complaint and cross-complaint sought punitive as well as compensatory damages.

The case came up for jury trial in November 1996. With the agreement of the parties, the court divided the trial into two phases and submitted special verdicts to the jury after each phase. The first phase concerned the liability of the insureds, Shade and IPS, for the losses resulting from the almond contamination; the second phase concerned the liability of the insurers to the insureds.

At the conclusion of the first phase, the jury completed a 15-question special verdict that, in general, found IPS liable to Shade on the basis of negligence, breach of contract, and breach of warranty, and found Shade liable to General Mills for breach of implied warranty. The verdict determined that the total damages suffered by Shade amounted to $2,146,640.60. After the second phase, the jury found that Northbrook breached the implied covenant of good faith and fair dealing toward both IPS and Shade and that Royal breached the implied covenant toward Shade. The verdict found that IPS had suffered business losses as a result of Northbrook's breach in the amount of $816,000 and made three separate awards of punitive damages against Northbrook and Royal.

At various times during the trial, the court received arguments and made determinations on issues of insurance coverage. With respect to coverage issues under the Northbrook policy, the court ruled before trial that there was potential liability and reserved a final determination until after the jury trial. In an order entered July 22, 1997, the court resolved all coverage issues against Northbrook. With respect to Royal's coverage, the court similarly found potential liability in a ruling before trial. Later, after hearing several days of testimony on the issue, the court found that Royal had not waived and was not estopped to contest Shade's liability to General Mills as a defense to its indemnification obligation.

With the consent of the parties, the court determined the entitlement of IPS and Shade to an award of attorney fees as damages through the procedure of posttrial motions, based on the jury's finding of the insurers' breach of the implied covenant of good faith and fair dealing. The court also received arguments dealing with the award of interest on the jury's verdict. Both these issues were resolved in the final judgment entered July 22,1997.

The final judgment involved a complex series of awards which may be divided into awards entered against Northbrook and against Royal. Against Northbrook: (1) $1,761,226.58 jointly to IPS and Shade as compensatory damages, consisting of $1 million for liability insurance coverage and $761,226.58 for property insurance coverage, plus interest; (2) $813,394 to IPS as compensatory damages for business losses, plus interest;¹ (3) $2 million to IPS in punitive damages; (4) $445,950.47 to Shade as damages for attorney fees and expenses, plus interest; and (5) $3 million to Shade in punitive damages. Against Royal: (1) $1,054,419.50 to Shade as compensatory damages for liability insurance coverage, plus interest; (2) $447,637.28 to Shade as damages for attorney fees and expenses, plus interest; and (3) $8 million to Shade in punitive damages.

Northbrook and Royal submitted extensive post-trial motions to vacate the judgment and for new trial and judgment notwithstanding the verdict, and, upon denial of the motions, filed timely...