Insurance Law Alert: Incorporation of Already Contaminated Ingredients Does Not Trigger Lloyd’s Products Contamination Insurance

In Windsor Food Quality v. Underwriters of Lloyds, et al. (No. E058324, filed 2/6/15) a California appeals court held that coverage for recall costs would only attach under a Lloyd’s Products Contamination Insurance policy where contamination of the product occurred during or after manufacturing, not before the insured began the process.

Windsor was a wholesale producer of beef products that purchased ground beef from a slaughterhouse in Chino, California. The slaughterhouse was suspended by the USDA from federal food and nutrition programs based on an investigation into the prohibited use of “downer” cows possibly infected with mad cow disease. This was followed by a recall of products containing beef from the slaughterhouse. Windsor had incorporated beef from the slaughterhouse into its products and incurred $3 million in recall costs.

Lloyds Underwriters had issued a $4 million products contamination insurance policy to Windsor that included coverage for “Accidental Product Contamination” and “Malicious Product Tampering” and defining “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 Underwriters denied coverage on the grounds that the slaughterhouse’s ground beef was not an “Insured Product” under the policy and—even if the ground beef was an insured product—it was not “tampered with” or the tampering was not “malicious.”

In the bad faith lawsuit that followed, Windsor contended that losses caused by the recall qualified for coverage because, ultimately, the slaughterhouse’s ground beef was an ingredient incorporated into Windsor’s final product. But Underwriters responded that an ingredient was only covered once it was incorporated into Windsor’s products. The court described the question in terms of frozen burritos: “Windsor would propose that a frozen burrito made with adulterated ground beef is an insured product. Lloyds would counter that a frozen burrito is only an insured product if it is adulterated during or after its preparation by Windsor. Lloyds disagrees that ‘Insured Product’ includes ingredients used to make Windsor’s products.”

The appeals court agreed with the Underwriters, and found the policy unambiguous. The court pointed out that the definition of insured product included “ingredients and components once incorporated therein,” and stated:

“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.”

The majority also pointed out that there was no evidence of actual contamination, but that the possibility had led to the recall. The court found its determination consistent with other cases addressing contamination insurance, as distinguished from general liability or recall insurance:

“At least some general commercial liability policies exclude losses incurred because of a recall. . . . The need to recall contaminated or adulterated products is a recognized risk of doing business in the heavily regulated food industry. Thus, the exclusion compels food companies . . . to purchase policies separately insuring against this risk. . . . This . . . brings into focus why insurers and food industry insureds would agree to limit Accidental Product Contamination coverage to recall incidents in which consumption of the contaminated or mislabeled product ‘resulted, or may likely result’ in physical symptoms of bodily injury, sickness or disease or death of any person. As other courts to consider this coverage have concluded, this is not a recall insurance policy.”

The holding drew a lengthy dissent from one justice, who argued that the policy was ambiguous, stating: “Within the context of the present matter, the more reasonable reading of the policy is that the product, and all of its ingredients, are insured for adulteration regardless of when the adulteration occurs. Thus to the extent there are two reasonable interpretations, the policy is ambiguous and should be construed against the insurer.”

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March 4, 2015