Hous. Cas. Co. v. Cibus U.S. LLC

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HOUSTON CASUALTY COMPANY, Plaintiff, v. CIBUS U.S. LLC, Defendant. And Related Counterclaim

No. 19-cv-00828-BAS-LL

United States District Court, S.D. California

September 27, 2021

ORDER: (1) DENYING HOUSTON CASUALTY COMPANY'S MOTION FOR SUMMARY OR PARTIAL SUMMARY JUDGMENT (ECF NO. 34) (2) GRANTING IN PART AND DENYING IN PART CIBUS U.S. LLC'S MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF NO. 40); AND (3) CLARIFYING ORDER ON MOTION TO BIFURCATE (ECF NO. 33)

Hon Cynthia Bashant, United States District Judge.

This case is an insurance coverage dispute between Houston Casualty Company (“HCC”) and Cibus U.S. LLC (“Cibus”). Cibus is a company that develops seeds for crops, including hybrid canola plants. Cibus developed its canola hybrids to be tolerant of a specific herbicide. It then sold seeds to commercial growers. But after some of those growers applied herbicide, their canola hybrids suffered more phytotoxicity-plant damage-than expected. Cibus turned to HCC, its insurer, to cover the growers' losses under an errors and omissions policy. HCC paid out the maximum of its policy with Cibus subject to the right to seek reimbursement. HCC then sued, seeking a determination that its policy did not cover the growers' crop injuries. Cibus countersued with breach of contract and bad faith claims.

Both HCC and Cibus now move for summary judgment or partial summary judgment. (ECF Nos. 34, 40.) The Court held oral argument on the motions, as well as HCC's Motion to Bifurcate (ECF No. 33). (ECF No. 81.) For the following reasons, the Court denies HCC's Motion for Summary or Partial Summary Judgment, grants in part and denies in part Cibus's Motion for Partial Summary Judgment, and clarifies the Court's Order on HCC's Motion to Bifurcate.

BACKGROUND

I. Cibus's Canola Hybrids

“Cibus is a late-stage start-up company that provides environmentally-friendly seed development and selection services using proprietary breeding technology.” (Broos Decl. ¶ 3, ECF No. 40-9.)^[1] One of the company's goals “is to provide herbicide-tolerant, non-genetically modified organism (‘non-GMO') canola seeds to its grower-customers.” (Id.) To date, Cibus's first and only commercial products are its herbicide-tolerate canola hybrids. (Id.) Cibus developed these hybrids to be tolerant to sulfonylurea (“SU”) herbicide. (Joint Statement of Undisputed Facts (“JSUF”) ¶ 13, ECF No. 72.) Draft^® is a brand name formulation of SU herbicides. (Id. ¶ 14.)

A. 2017 Crop Injury

In 2017, Cibus conducted a trial program of one of its canola hybrids (C5507) in Canada. (JSUF ¶ 17.) Cibus provided approximately 100 growers with free seeds to grow 40-acre plots of the C5507 hybrids. (Id.) After applying Draft, some of the growers reported higher than anticipated levels of plant damage-phytotoxicity-to their crops. (Id. ¶ 18.)

Cibus and its agricultural consultant, AgCall, investigated the growers' reports. (JSUF ¶ 19.) In August 2017, Cibus placed its insurer at the time, Certain Underwriters at Lloyd's, London, on notice of the 2017 crop injury. (HCC's MSJ Ex. R, at 216:14-217:16, 222:11-19; Ex. S.) Cibus later decided not to proceed with an insurance claim. (Id. Ex. R, at 222:11-19.) It instead compensated the Canadian growers out-of-pocket with cash payments and seeds totaling CAD $196, 774 and trips to San Diego worth approximately $100, 000. (See Id. Ex. T.)

B. 2018 Crop Injury

For the 2018 growing season, Cibus developed a “White Glove” service program to provide more specific instructions and hands-on customer support to try to avoid chemical application errors by growers to the canola hybrids. (JSUF ¶ 20.) Cibus also purchased an errors and omissions liability policy from HCC. (Id. ¶ 1.)

In 2018, Cibus provided its C5507 canola hybrids for growers in the United States and Canada. (JSUF ¶ 15.) It also provided another hybrid seed variety (C5522) for growers in the United States. (Id. ¶ 16.) However, after applying Draft, some growers of the C5507 hybrids in Canada and the C5507 and C5522 hybrids in the United States reported higher than anticipated levels of damage to their crops. (Id. ¶ 21.)

C. Cause and Foreseeability of the 2018 Crop Injury

HCC believes Cibus knew there were fundamental problems with the design of its canola hybrids when Cibus sought insurance for the 2018 season. (HCC's MSJ 6.) To support this theory, the insurer explains that Cibus's canola hybrids gain their resistance to SU herbicide through specific gene mutations-the “SU Tolerance Gene.” (Id. Ex. B, at 32:8-22.) Cibus first produced canola varieties that had two copies of the SU Tolerance Gene-seed lines C5507 and C5522. (Id. 32:23-33:13.) These varieties are “duo” hybrids because they have two copies of the SU Tolerance gene. (See Id. 32:18-36:20.)

Before 2015, Cibus began researching “quattro” canola hybrid varieties that have four copies of the SU Tolerance Gene. (HCC's MSJ Ex. B, at 119:23-121:11; Ex. C, at 114:22-24, 117:13-118:6.) Quattro varieties demonstrate greater tolerance to SU herbicide and a reduced risk of plant damage when compared with duo varieties. (Id. Ex. C, at 133:21-24, 150:23-151:5, 152:12-153:22.) These improved varieties were in commercial development by 2017 and rolled out by 2019. (Id. Ex. B, at 121:9-11; 188:25-196:19.)

HCC highlights several communications between Cibus employees suggesting the company knew its duo hybrids would encounter problems in 2018. In July 2017, Cibus's Associate Director of Product Development wrote that the company “will have to manage the message around, if not temper expectations in 2018.” (HCC's MSJ Ex. M.) He continued:

The technical risk will go down a great deal once the [SU Tolerance Gene] is in both sides of the pedigree, but we need to be able to provide technical agronomy support on the ground in Canada with our sales staff to be successful. Finally, to plug the breeding and genetics side of things, the future will be VERY bright for SU canola in 2019 and beyond!

(Id.) Similarly, in October 2017, a Cibus employee stated the company “has new hybrids under [ ] development that will increase our herbicide tolerance to SU chemistries with 4 copies of the SU tolerant gene in the plant which will add additional crop protection, but these new lines (Quattro Hybrids) are [a] couple of years away from commercial sales.” (Id. Ex. O.)

Cibus paints a different picture. Relying on a declaration from Dr. James A. Radtke, Cibus's Senior Vice President of Product Development, Cibus stresses that each year, the company produces new seed lots, primarily at contra-season growing facilities in Chile, to be sold in the upcoming growing season. (Radtke Decl. ¶ 4, ECF No. 40-11.) So, the seeds used in the 2018 growing season were not grown until the winter of 2017-18, after which they were harvested and transported to the United States for use in the 2018 canola growing season in North America. (Id. ¶ 5.)

Further, Cibus explains that it believes the 2017 crop issues were traced to how the Canadian growers applied herbicide to their crops. (Radtke Decl. ¶ 11.) Cibus believes cultural differences in the way herbicides and their associated adjuvants are packaged and sold in Canada led to growers applying the chemicals to their crops in a manner that led to excessive damage. (Id.) Hence, Cibus created the “White Glove” customer program mentioned above to prevent this from occurring the following year. (Id. ¶ 12.)

In comparison, for 2018, Dr. Radtke is not aware of “any indication that the crop issues those growers suffered were the result of chemical misapplication.” (Radtke Decl. ¶ 13.) Rather, after an investigation, Dr. Radtke determined the 2018 growers' issues were the result of genotype-environment reactions (“GxE”) “that resulted from the growing environment in 2018.” (Id. ¶ 15.) “These growing conditions had not previously been encountered by Cibus canola, meaning that the GxE interactions that occurred in 2018 were not observed in the several prior years of testing and commercial use of Cibus canola hybrids.” (Id.) And, at least from Dr. Radtke's perspective, the company was surprised when these interactions occurred in 2018 and caused some of its customers “to suffer poorer harvests than they otherwise would have.” (Id.)

II. The Policy A. Terms

As mentioned, Cibus purchased insurance from HCC before the 2018 growing season. HCC issued Professional Liability Errors & Omissions Insurance Policy No. H717-110623 (“Policy”) to Cibus for the November 1, 2017, to November 1, 2018, Policy Period. (JSUF ¶ 1.) The Policy has a $2 million limit. (Id.) Its Insuring Agreement, Section 1.A, provides:

[HCC] shall pay Loss and Claim Expenses . . . that an Insured shall become legally obligated to pay as a result of a Claim made against an Insured for a Wrongful Act arising from Professional Services provided always that: (1) the Claim is first made against an Insured during the Policy Period . . .; (2) an Insured's partners, principals, officers, directors, members or risk managers had no knowledge of any circumstances, dispute, situation or incident that could reasonably have been expected to give rise to such Claim prior to the Knowledge Date stated in the Declarations of this Policy; and (3) the Wrongful Act takes place on or after the Retroactive Date . . . and prior to the end of the Policy Period.

(Id. ¶ 2; Policy § I. (A), HCC's MSJ Ex. A.)^[2] A “Claim” is “a written demand made against any Insured for monetary damages or non-monetary relief[.]” (Policy § IV. (C).) Further, a “Wrongful Act” is “any actual or alleged negligent act, error or omission committed or allegedly committed by any Insured solely in connection with the rendering of Professional Services.” (Id. § IV. (CC).) The Policy defines “Professional...