On May 20, 2015, the California Supreme Court denied Windsor Food Quality Company, Ltd.’s (Windsor’s) petition for review of the decision of the Court of Appeal for the Fourth Appellate District of California that denied coverage under a contamination products insurance (CPI) policy related to a ground beef recall. See Windsor Food Quality Co. Ltd. v. The Underwriters of Lloyds of London et al., No. S225719, California Supreme Court. California’s highest court denied Windsor's petition for review without explanation.

In February 2015, in a 2-1 decision, the Fourth Appellate District of California had affirmed the trial court’s decision in favor of QBE Insurance (Europe) Limited and the Underwriters of Lloyd’s of London (Underwriters). The intermediate appellate decision addressed Windsor’s claim for insurance coverage under the CPI policy, which included coverage for “accidental product contamination” and “malicious product tampering.”

Trial Court Decision

Windsor’s claim for insurance coverage arose out of a ground beef recall by Westland/Hallmark Meat Company (Westland). Windsor used Westland’s ground beef as an ingredient in its José Olé® frozen food products. The ground beef was recalled based on potential risks related to the company's use of disabled cattle that may have been infected with mad cow disease or other maladies. As a result of the issues with Westland’s product, Windsor recalled its own products that incorporated Westland beef. Windsor incurred approximately $3 million in costs due to the recall.

Underwriters denied Windsor’s claim for coverage because they determined it did not constitute an “accidental product contamination insured event” as such term was defined in the policy. Windsor subsequently filed 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.

Fourth Appellate District of California Decision

On appeal, the Court of Appeal for the Fourth Appellate District of California found the term “insured product” unambiguous, which resulted in favorable rulings for the insurers. See Windsor Food Quality Co., Ltd. v. Underwriters of Lloyds of London, 234 Cal. App. 4th 1178 (Feb. 6, 2015). 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 Court found that the USDA’s recall was based on Westland’s failure to notify the USDA about its use of disabled cows, not because there had been contamination or tampering. Therefore, the Court ruled that there was no contamination or tampering of Westland’s or Windsor’s products and, consequently, no malicious product contamination.

In addition, the Court held that there had not been an “accidental product contamination insured event.”  As the Court found no coverage under the CPI policy, it also dismissed the bad faith causes of action.

The Court found the CPI policy’s wording unambiguous. 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 dissent asserted the language in the policy was ambiguous and therefore should be construed against the insurer.

Implications of the California Supreme Court’s Denial of Review

As a result of the California Supreme Court’s refusal to review the appellate court’s decision, Windsor Food remains a continuation of the line of national and California decisions finding no coverage under product contamination policies for incidents involving only potential and not actual contamination. In addition, Windsor Food provided an opportunity for the California Supreme Court to address alleged ambiguities with CPI policy wording, and it chose not to do so.

The Windsor Food decisions are important because they raise certain wording issues as the food industry is about to face the issuance of new regulations under the FDA Food Safety Modernization Act (FSMA). As the regulations are issued this summer and fall, food companies will face an increasingly hostile regulatory environment and will need to enhance standard insurance portfolios with coverage for product contamination. In addition to coverage for accidental product contamination and malicious product tampering, companies should consider government recall and adverse publicity coverages. Based on the size of the company, the area of the industry in which it operates and its place on the supply chain, companies will need to consider different CPI policy wordings and coverages. Experienced brokers and underwriters can assist food companies with the emerging regulatory risks.