Windsor purchased a policy that provided “accidental product contamination” and “malicious product tampering” coverage. An “insured event” was defined as “(a) any actual Accidental Product Contamination; (b) any Malicious Product Tampering; (c) any Product Extortion Demand.” The accidental product contamination coverage required that someone become ill within 120 days of ingesting the contaminated product.
The court reasoned that Westland’s beef was recalled because Westland failed “to notify the USDA about downer cattle and submit to an inspection,” not because of product tampering or extortion. It found that there was no evidence that Westland’s beef was tampered or contaminated. Rather, the beef was subjected to recall because of potential risk. In fact, no one became ill from Windsor’s product.
The court concentrated its decision on the meaning of the term “ingredient” and the phrase “incorporated therein,” used in the definition of “insured product,” which in pertinent part read “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 .... “
Lloyds argued “that an ingredient is only covered once it has been incorporated into Windsor’s products.” For example, “a frozen burrito is only an insured product if it is adulterated during or after its preparation by Windsor.” Therefore, Lloyds asserted that ingredients used by Windsor to make its products would not constitute an “Insured Product.” Lloyds’ argument may seem refutable, because the term “ingredient” is specifically included in the definition of insured product. However, the court found no ambiguity, and ruled in favor of Lloyds.
The court contradicted Windsor’s expectations as to the coverage that it bought. It held that “‘Insured Product’ clearly does not encompass an ingredient obtained from a supplier, like the ground beef supplied by Westland.” The court reasoned that “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 the ingredients supplied by a third party was adulterated.”
Judge King’s dissent asserts however, that the policy, specifically the insured products and malicious product tampering sections, is ambiguous. He reasoned that “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.”
The court’s decision does raise issues. As the court says, the beef was an ingredient - and the policy covers ingredients. Nowhere does the policy draw a distinction between pre-existing contamination in an ingredient or contamination introduced solely during the manufacture of the product. The court did not address this issue. Moreover, Windsor mixed the beef with other food products during the processing and manufacturing of the insured product, such that the recalled beef was incorporated into Windsor’s products during production, manufacturing and packaging.
Windsor Food presents a cautionary tale for all those purchasing contamination products insurance. Based on the court’s interpretation, even if the Westland beef was proven contaminated, there would still be no coverage for Windsor under the policy. Rather, as the dissent suggests, the “adulteration of the ingredient must occur after the ingredient has become part of the product (i.e., the meat ingredient must be adulterated ‘once incorporated into’ the burrito).” Are companies purchasing coverage, or coverage litigation? Food companies must work carefully with their brokers and consultants to ensure that these policies meet the policyholder’s expectations.
Keywords: contamination products insurance, food recall, contamination, tampering, insurance
Robert D. Chesler and Janine M. Stanisz are with Anderson Kill PC, Newark, New Jersey.