In 2008, Windsor Food Quality Company, Ltd. (Windsor) purchased Westland/Hallmark Meat Company’s (Westland’s) ground beef as an ingredient to be used in its José Olé® frozen food products. On January 30, 2008, the U.S. Department of Agriculture (USDA) suspended Westland’s operations based on its use of non-ambulatory disabled cattle or “downer” cows. A voluntary Class II recall involving two years of Westland’s products was announced on February 17, 2008. Windsor also conducted a voluntary recall of its products incorporating Windsor’s beef, which amounted to approximately $3 million in recall costs.

Trial Court Decision

QBE Insurance (Europe) Limited and Underwriters at Lloyd’s London issued a contamination products insurance (CPI)  policy to Windsor. A few months after it was tendered, the claim was denied because the insurers determined that it did not constitute an Accidental Product Contamination Insured Event within the meaning of the  policy. Windsor brought a declaratory judgment action against the insurers in California Superior Court of San Bernardino County, entitled Windsor Food Quality Company, Ltd. v. The Underwriters of Lloyds London, CA Super. Ct. No. CIVRS905013 (Feb. 6, 2015).

On summary judgment, the trial court found no disputed issues of fact and no evidence of a public health risk or of product tampering. The trial court also found that the recalled products were not an Insured Product under the CPI policy.

Appellate Court Ruling and Analysis

On appeal, the Court of Appeal for the Fourth Appellate District of California initially found that Windsor had the burden of establishing that its claim fell within the CPI policy’s basic coverage. In other words, Windsor was required to establish that its claim constituted an Accidental Product Contamination or Malicious Product Tampering Insured Event.

As part of its analysis, the Court discussed the parties’ differing positions regarding the definition of “Insured Product” and ultimately found that the term was unambiguous, which resulted in favorable rulings for the insurers.

The Court ruled that any contamination or tampering must take place during or after manufacture but not before Windsor’s production processes. In support of this ruling, the Court cited to the decision rendered in Caudill Seed & Warehouse Co., Inc. v. Houston Cas. Co., 835 F.Supp.2d 329 (W.D. Ky. 2011).

The Windsor Food Court appears to have agreed with the insurers that there was no evidence of intentional or malicious adulteration of Windsor’s products. The Court also appears to have rejected Windsor’s contention of “rogue employees” contaminating Westland’s ground beef. The Court found that the USDA’s recall was based on Westland’s failure to notify it about the “downer” cows, not because there had been contamination or tampering. Based on the lack of evidence, the Court ruled that there was no contamination or tampering of Westland or Windsor’s products. On those facts, Windsor was unable to carry its burden of proving Malicious Product Contamination.

Additionally, finding that no injuries occurred in regard to the consumption of the recalled products, the Court held that, for purposes of the CPI policy, no Accidental Product Contamination Insured Event had happened. As the Court found no coverage under the CPI policy, it also dismissed the bad faith causes of action.

Significantly, in its coverage rulings, the Court found the CPI policy’s wording unambiguous. As such, the Court determined it was unnecessary to seek additional legal or dictionary definitions of certain undefined terms, including “tampering,” “adulteration,” “alteration” or “malicious.” The Court also held that the CPI policy is not a recall insurance policy and cited a number of decisions in support of this holding.

The Court’s decision included a vigorous and reasoned dissent, which provides for the possibility that the decision may be appealed to California’s Supreme Court.

Takeaways

On one level, one could argue that  Windsor Food  represents a  mere continuation of  the line of California decisions finding no coverage under PCI policies for incidents involving potential contamination. On another level, however, it raises several important issues about coverage under PCI policies. The ruling is particularly instructive to underwriters and brokers as it raises discussion points about the timing of supply chain incidents, wordings, definitions and the extent of coverage. Future decisions will undoubtedly provide further guidance on these – and other – questions.