Where’s the beef: A recent decision explores the boundaries of “insured products”

One recent appellate decision puts manufacturers on notice that they must take care in purchasing commercial insurance policies to ensure that their general liability policies provide the coverage they expect. A California appeals court has just handed down a verdict siding with insurer Lloyds of London in the insurance company’s denial of a claim involving $3 million in recalled beef used in frozen tacos and burritos. In Windsor Food Quality v. Underwriters of Lloyds, et al., the appellate court found that the policy underwritten by Lloyds covered the products made with the beef, but not the beef itself. The recalled beef was used in frozen tacos and burritos manufactured by Windsor Food Quality Company and marketed under the brand name, “Jose Ole.”

Windsor Food, which had a $4 million “Products Contamination Insurance” policy with Lloyds that covered “Accidental Product Contamination” and “Malicious Product Tampering,” had filed the claim shortly after the beef was recalled in 2008, as part of the largest beef recall in US history. Lloyds rejected Windsor’s claim on the grounds that it did not insure the beef, just the products in which the beef was used, and that there had been no accidental product contamination or malicious-product tampering of the product itself.

 The beef had been recalled following the suspension of the slaughterhouse, which was owned by a third party and which the U.S. Department of Agriculture had closed down following reports that it was using “downer” cows, or cows that were too sick to be used in the manufacture of food products. The beef recall, which was widely reported in the news media, was spurred on after secret video was released showing sick cows being kicked and pushed along by forklifts when they couldn’t walk on their own.

When Lloyds denied Windsor’s claim for the cost of the recall, Windsor filed suit alleging bad faith by Lloyds. The lower court, however, ruled in Lloyds’ favor, saying that it all came down to what constitutes an “insured product.” Justice Carol Codrington of California’s Fourth District, said, “Lloyds policy provides coverage for insured products and an insured event…Windsor must show there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

In upholding the lower court’s verdict, the appellate court also noted that, in the Windsor case, there was no evidence of actual contamination but rather, that the possibility of contamination had led to the recall.

The appellate court pointed out that recalls are a well-recognized risk of doing business in the food industry and that food companies may want to consider purchasing separate policies insuring against the risk of recall that include 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.” The court concluded that Windsor’s policy did not include this coverage.

If you would like assistance in addressing your company’s commercial insurance questions, or in reviewing your company’s current insurance coverages, please feel free to call Alex Brown, Chair of the Insurance Law Group at Shapiro Sher Guinot & Sandler, at 410-385-4220.