Taco Bell franchisees prevail in insurance suitTaco Bell franchisees prevail in insurance suit

Lisa Jennings

NEW BRUNSWICK N.J. A New Jersey Superior Court judge has ruled that a company providing foodborne illness insurance to a group of Taco Bell franchisees could not deny coverage because of an unclear exclusion in the policy.

The decision last week stems from a lawsuit filed by the underwriters of insurance company Lloyds of London against about 70 Taco Bell franchisees who operated about 1,300 locations in 2006, when an outbreak of E. coli O157:H7 sickened about 70 people. At points during the outbreak, about 90 Taco Bell locations in four states were closed — some for up to two weeks. Parent company Yum! Brands Inc. later said the incident cost the company $20 million in lost operating profit.

The source of the contamination was ultimately determined to be prewashed bagged lettuce from a supplier. At the time, the Taco Bell franchisees believed they had insurance coverage for revenue losses that might stem from reports of foodborne illness. However, when they filed their claims, they learned that their policies had been changed to include an “aggregate supplier incident sublimit,” which Lloyds said excluded losses stemming from food contamination caused by a supplier.

According to the ruling, Lloyds’ underwriters argued that the losses were ultimately the suppliers’ fault, saying “if the contaminated products were never provided, they would never have been served, and there would have been no outbreak and no media reports.”

When the franchisees objected to their coverage being denied in 2007, Lloyds filed a lawsuit — initially in Kansas, though it was later moved to the court in New Jersey — asking the court whether the exclusion could be allowed.

In the ruling June 12, the court said the insurance company never explained the exclusion or the fact that the policyholders’ insurance coverage was reduced by the change in policy.

The judge also said the language describing the sublimit was rife with undefined terms. The judge said, for example, that the lettuce in question was not a “product” for which the insurance policy would not apply, as argued by Lloyds, but an “ingredient” that would be covered.

William Passannante, an attorney representing the franchisees, said the ruling confirmed that “if you’re going to reduce insurance coverage, you have to let the policy holder know.”

The franchisees have not yet filed for damages in the case, though that might be the next step, Passannante said. The policy limit was set at $30 million.

Contact Lisa Jennings at [email protected].