Windsor Food Quality Company, Ltd. v. The Underwriters Of Lloyds Of London

(Contaminated Beef Provided by Supplier to Insured for Use in Manufacturing its Food Products Did Not Constitute an “Insured Product” Entitling Insured to Coverage for the Recall of Such Products Based on the Fear of Contamination.)

In Windsor Food Quality Company, Ltd. v. The Underwriters of Lloyds of London, 234 Cal.App.4th 1178 (February 6, 2015), the California Fourth District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Underwriters of Lloyds of London (“Lloyds”) in connection with recall claim under a first party policy affording coverage for contamination of food products. Lloyds issued the policy to the insured, Windsor Food Quality Company, Ltd. (“Windsor”). Windsor is a wholesale producer of beef products. Its supplier, Westland, allegedly provided Windsor with contaminated beef. In that regard, on January 30th, 2008, the USDA suspended Westland as a supplier to federal food and nutrition programs because of an investigation of the prohibited use in human food of “non-ambulatory disabled cattle (“downer cows”) and cattle tissue identified as specified risk materials.” On February 17, 2008, the USDA announced a voluntary Class II recall of all Westland products for a two year period because Westland had used “downer cattle” that may have been contaminated. One possible risk was infection by Bovine Spongiform Encephalopathy (known as “mad cow” disease, that can cause a neurological disease in humans). Based on the USDA’s recall of Westland beef, Windsor recalled its products, incorporating Westland beef, and incurred about $3 million in recall costs. Westland tendered the cost of recalling its products to Lloyds under a contamination products insurance policy affording coverage of $4 million. Such coverage extended to “accidental product contamination” and “malicious product tampering.” Section 1.2 in the policy defined an “insured event” as (a) “any actual accidental product contamination; (b) any Malicious Product Tampering; and (c) any Product Extortion Demand.” In conjunction with such coverage, section 5.7 of the policy defined “insured products” as “all products including their ingredients and components once incorporated therein of the insured that are in production or have been manufactured, packaged or distributed by or to the order of the insured.” The policy defined “malicious product tampering” as “the actual or threatened intentional, malicious and illegal alteration or adulteration of the insured’s products whether in conjunction with a product, extortion demand or so as to give the insured or consumers reasonable cause to consider the insured’s products unfit or dangerous for their intended use.”

Lloyds denied Windsor’s claim for “accidental product contamination” which would lead to or has led to bodily injury, sickness or disease of any person, animal or livestock physically manifesting itself within 120 days of its consumption or use. In that regard, it was undisputed that there was no actual injury to consumers from Westland beef within 120 days.

In granting Lloyds’ motion for summary judgment regarding coverage under its policy for Windsor’s recall claim, the trial court, found in part, that the recall products were not an “insured product” under section 5.7 of the policy and Lloyds had acted reasonably in denying coverage.

In affirming the trial court’s decision, the Court of Appeal found that the definition of “insured products” was unambiguous and did not encompass products contaminated by the incorporation of Westland’s beef into Windsor’s finished products. The Court of Appeal stated as follows:

We conclude the subject policy is not ambiguous. Unlike the dissent, we hold the policy's definition of what constitutes an insured product clearly does not encompass an ingredient obtained from a supplier, like the ground beef supplied by Westland. Lloyds's policy provides coverage for insured products and an insured event. An insured event involves product contamination or tampering. An "Insured Product" means "all products including their ingredients and components once incorporated therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured . . . . [Emphasis added.]" In plainer language, Windsor must show there was contamination or tampering with its product during or after manufacture, not before Windsor began the process. In order for a frozen burrito to qualify as an insured product, there must have been contamination or tampering during production, manufacture, packaging, or distribution—not because one of its ingredients supplied by a third party was adulterated. (See Caudill Seed & Warehouse Co., Inc. v. Houston Cas. Co. (2011) 835 ESupp.2d 329, 335-336 [ recall of peanut products processed by insured did not trigger accidental product contamination coverage.].)

In addition, the Court of Appeal held that there was no evidence of any contamination or tampering of Westland beef. Hence, there was no evidence that the recall occurred because Westland employees tampered with or contaminated the ground beef supplied to Windsor.

Absent coverage under the Lloyds policy, the Court of Appeal went on to affirm the trial court’s determination that Lloyds had not breached the implied covenant of good faith and fair dealing.