The California Court of Appeal for the Fourth Appellate District held that a contamination products policy does not cover ingredients obtained from a supplier and incorporated into the insured manufacturer’s product.

The insured, Windsor Food Quality Company, Ltd. (“Windsor”) manufactured Jose Ole frozen food products using ground beef supplied by Westland/Hallmark Meat Company (“Westland”).  The United States Department of Agriculture (“USDA”) announced a voluntary recall of all products containing Westland’s ground beef because Westland had used “downer cattle” that may have been contaminated.  One possible risk was an infection known as “mad cow disease” that can cause neurological diseases in humans.  Windsor recalled its products which had incorporated Westland ground beef and incurred an approximate $3 million loss. 

The Underwriters of Lloyd’s London (“Lloyd’s”) had issued a contamination products policy to Windsor covering “Accidental Product Contamination” and “Malicious Product Tampering.”  Windsor tendered the loss to Lloyd’s and sought $3 million in policy benefits.  Lloyds denied the tender contending that the contamination products policy did not provide coverage for the recalled products.  Windsor then filed suit for breach of contract, bad faith and declaratory relief.  The trial court granted Lloyd’s motion for summary judgment and Windsor timely appealed

The California Court of Appeal for the Fourth Appellate District found that there was no ambiguity as to the relevant provisions in the Lloyd’s policy and Windsor had failed to meet its burden of proving that the claim fell within the scope of coverage.  For coverage to exist under the policy, the insured was required to prove the existence of “Malicious Product Tampering” to an “Insured Product”.  “Malicious Product Tampering” was defined as “the actual or threatened intentional, malicious and illegal alteration or adulteration of the Insured’s Products . . . so as to give the Insured’s consumers reasonable cause to consider the Insured Products unfit or dangerous for their intended use.”  “Insured Products” was defined 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… .”  Windsor argued that the frozen food products containing the contaminated beef qualified as an “Insured Product” because the beef was incorporated into Windsor’s final product.  The court disagreed, finding the plain meaning of the policy required Windsor to prove “there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

The court also found that the record revealed no evidence of any contamination or tampering of Westland beef.  Though it was undisputed that two Westland employees were charged with felony animal abuse, the record established that the USDA’s recall was not premised on suspected tampering or contamination.  Instead, the recall was premised on Westland’s failure to notify the USDA of the “downer cattle” (non-ambulatory disabled cattle, the use of which is prohibited in human food) and to submit to USDA inspection.

The court also addressed accidental product contamination coverage provided by the policy.  However, that coverage only applied if injury occurred within 120 days of consumption of the product.  There was no dispute that no such injury or sickness occurred within 120 days of consumption, so no coverage was afforded.

The dissent found that the definition of “Malicious Product Tampering” and “Insured Products” was ambiguous when read in the context of the policy and the circumstances presented.  The dissent argued that a more reasonable interpretation of these terms was that coverage was provided where the insured’s products, or any of their ingredients, were adulterated, regardless of when such adulteration occurred.  However, the majority did not find the policy ambiguous and affirmed the grant of summary judgment to Lloyd’s.

Click here for the opinion

This opinion is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.