SAN BERNARDINO, Calif. (CN) - Insurers had no obligation to pay for a frozen food company's losses in the wake of the "downer" cow ground beef recall, a state appeals court ruled Tuesday.
Windsor Food Quality Company - manufacturer of "Jose Ole" frozen goods - sued insurers Lloyd's of London and QBE Insurance after Lloyd's refused to cover losses following the recall of ground beef supplied by Westland/Hallmark Meat Company in 2008.
The beef recall - at the time the largest in U.S. history - stemmed from documentation of animal abuse by the Humane Society of the United States, which secretly videotaped workers at a slaughterhouse in Chino, Calif. kicking sick cows and using forklifts to make them walk.
Under USDA rules, meat from "downer" cows - animals that that cannot walk on their own - is unfit for human consumption. And although there were no reports of illness from the meat, Westland agreed to voluntarily recall 143 million pounds of ground beef.
Windsor recalled its products containing Westland beef, incurring about $3 million in recall costs. It filed a claim with Lloyds, which had issued a $4 million policy including coverage for accidental product contamination and malicious product tampering.
Lloyds denied the claim since no one got sick from eating any of the Jose Ole products containing Westland beef, leading to a breach of contract lawsuit from Windsor.
A San Bernardino County Superior Court judge agreed with Lloyds that Windsor had not shown any triable issues of fact, since the recalled beef carried no real health risks and the frozen food had not been tampered with. Additionally, the judge ruled that individual ingredients in Windsor's burritos cannot be considered "insured products" under the parties' contract - and dismissed the suit.
On Tuesday, a panel for the Fourth Appellate District agreed in a 2-1 opinion.
"We conclude the subject policy is not ambiguous," Judge Carol Codrington wrote for the panel. "The policy's definition of what constitutes an insured product clearly does not encompass an ingredient obtained from a supplier, like the ground beef supplied by Westland. 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."
Codrington added that there was no evidence that the Westland beef was contaminated or tampered with, despite the admitted abuse of the cows at the slaughterhouse. And although Windsor's policy with Lloyds does allow for accidental product contamination, the coverage only applies when someone falls sick within 120 days of eating the product - and no one ever became sick, the judge said.
But in a dissent, Judge Jeffrey King said the insurance policy was "ambiguous and should be construed against the insurer."
"By stressing the words 'once incorporated therein,' the majority is interpreting the above clause as indicating that 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)," King wrote. "I would suggest that if we accept this interpretation of when the ingredient must be adulterated, a large part of the production process would not be covered."
The dissenting judge also indicated he believed questions about the maliciousness of Westland's treatment of its beef call for a trial to determine the facts of the case.
"There is evidence in the record that there was a Class II recall, which means 'a health hazard situation where there is a remote probability of adverse health consequences,'" King wrote. "The Food Safety and Inspection Service designated the beef as unfit for human consumption and plaintiff was requested by the United States Department of Agriculture to comply with the requirements for the product recall. Further, there was no evidence submitted by defendant that the adulteration of the meat was not illegal and was not done with conscious disregard for the health and safety of others."
In 2013, a panel for the 8th Circuit Court of Appeals ordered a meatball manufacturer to pay General Mills $1.4 million after the company destroyed cans of its Progresso soup containing recalled Westland beef.
Subscribe to Closing Arguments
Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.