Lead Opinion
I
INTRODUCTION
Plaintiff and appellant Windsor Food Quality Company, Ltd. (Windsor), manufactured Jose Ole frozen food products, using ground beef supplied by Westland/Hallmarlc Meat Company (Westland). In 2008, after a voluntary United States Department of Agriculture (USDA) recall of Westland beef, Windsor made a claim under its contamination products insurance policy,
Windsor appeals, arguing that it is entitled to insurance coverage based on a reasonable interpretation of Lloyds’s policy. Windsor also contends that whether Lloyds acted in bad faith remains a triable issue of fact, which only a jury can resolve.
Lloyds responds that Westland’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.” Finally, Lloyds contends that, even if it wrongly denied coverage, it acted reasonably as a matter of law, and is not subject to bad faith liability.
As the dissent recognizes and articulates, this dispute ultimately concerns whether the Lloyds policy covers ingredients obtained from a supplier and used in Windsor’s products. We conclude Windsor cannot claim coverage for the recall of Westland’s ground beef. We agree with the trial court there are no disputed material facts and no bad faith by Lloyds. We affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Complaint
Windsor sued Lloyds for denying its claim for the losses caused by the recall of its products containing Westland’s ground beef. Windsor’s operative complaint asserts three causes of action for the breach of an implied covenant of good faith and fair dealing, breach of contract, and declaratory judgment. Windsor maintains it is entitled to coverage under the insurance provision for “Malicious Product Tampering.” The first amended complaint makes the following allegations.
Windsor is a wholesale producer of beef products and Westland is its supplier. Windsor purchased ground beef from a Westland slaughterhouse in Chino. Westland employees admitted participating in criminal animal abuse.
On January 30, 2008, the USDA suspended Westland as a supplier to federal food and nutrition programs because of an investigation of the prohibited use in human food of “non-ambulatory disabled cattle [(downer cows)] and cattle tissue identified as specified risk materials.” On February 17, 2008, the USDA announced a voluntary class II recall of all Westland products for a two-year period because Westland had used “downer cattle” that may have been contaminated. One possible risk was infection by bovine spongiform encephalopathy (BSE), known as “mad cow” disease, that can cause Creutzfeldt-Jakob disease (CJD), a neurological disease in humans. As described by the USDA, a class II recall involves “a health hazard situation where there is a remote probability of adverse health consequences from the use of the product.” Windsor recalled its products, incorporating Westland beef, and incurred about $3 million dollars in recall costs.
Lloyds issued a $4 million policy for contamination products insurance to Windsor, effective from May 6, 2007, to May 6, 2008, which includes coverage for “Accidental Product Contamination” and “Malicious Product Tampering.” Section 1.2 defines an “Insured Event” as “(a) any actual Accidental Product Contamination; [][] (b) any Malicious Product Tampering; [][] (c) any Product Extortion Demand.” Section 5.7 of the insurance policy defines “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 . . . .” (Italics added.) Section 5.10 provides that “Malicious Product Tampering” means “the actual or threatened intentional, malicious and illegal alteration or adulteration of the Insured[’s] Products whether in conjunction
2. Summary Judgment Motion
The parties identified two sets of material facts in their combined separate statements. We summarize the facts, determining whether any material facts are effectively disputed by Windsor.
The parties concur as to Lloyds’s description of the USDA’s comprehensive testing and recall procedures and Lloyds’s explanations of CJD and BSE, including the declaration of Dr. Richard T. Johnson, a neurologist and an expert on CJD. Dr. Johnson explained the average incubation period for CJD in a human is at least 10 years and “[tjhere is no evidence that manifestation of such illness will occur within a period of 120 days of consumption of BSE contaminated beef products.” There were no reports or evidence of anyone becoming ill from ingesting Windsor’s products.
The USDA class II voluntary recall was based on “ ‘a health hazard situation where there is a remote probability of adverse health consequences.’ ” The USDA stated the recall was about failure to comply with FSIS regulations and “was not about food safety” and “really not a health-related issue.” In particular, the recall was caused by Westland’s failure to initiate USDA inspections of downer cattle. Windsor attempted to dispute these assertions by describing them as Lloyds’s attempt “ ‘publicly [to] downplay the recall’s significance.’ ” Without identifying any evidence, Windsor contends that, if there had not been a health risk, then the USDA would have declared a class III recall, not a class II recall. Windsor submitted additional facts about BSE and CJD, which Lloyds countered were irrelevant, inaccurate, or not disputed.
As fact No. 51, Lloyds asserted, “ ‘[tjhere was no intentional and malicious adulteration of the products of Windsor Foods. [’] ” As evidence, Lloyds cited the testimony of two witnesses — Windsor employees, Michael Cramer and
As fact No. 52, Lloyds asserted that Windsor had been advised by an industry expert that its claim would not be covered under the insurance policy. Lloyds cited e-mail communications exchanged between Cramer, Martinez, Stanley Smith, and an insurance consultant, Robert Garfield. Windsor objected on the grounds of hearsay, relevance, and foundation and argued that Garfield’s opinion “involved the general sentiments of the insurance industry about the legions of claims that affected companies were making.” Finally, Lloyds responded to Windsor’s various arguments — labeled as facts — about denial of coverage under the insurance policy as irrelevant, inaccurate, or not disputed.
3. The Summary Judgment Motion
In its order granting summary judgment to Lloyds, the trial court sustained Windsor’s objections to the evidence Lloyds had submitted about the e-mails in support of fact No. 52. Nevertheless, the trial court found there were no triable issues of any material fact. The court cited the uncontroverted medical evidence by Dr. Johnson that there was no public health risk of CJD or BSE and the court found there was no evidence to establish tampering with an insured product. Additionally, the court found the recalled products were not an “Insured Product” under section 5.7 of the policy and Lloyds had acted reasonably in denying coverage.
Ill
DISCUSSION
1. Standard of Review
Summary judgment was properly granted in this case if there were no triable issues of material fact and Lloyds was entitled to judgment as a matter of law: “The purpose of the law of summary judgment is to provide courts with a mechanism to cut through the parties’ pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their
Lloyds was entitled to summary judgment if it established a complete defense to Windsor’s causes of action, or showed that one or more elements of each cause of action cannot be established. (Code Civ. Proc., § 437c, subd. (o); Aguilar v. Atlantic Richfield Co., supra,
The trial court bases its determination on the issues as framed by the pleadings and on the evidence submitted by the parties: “In determining the propriety of a summary judgment, the trial court is limited to facts shown by the evidentiary materials submitted, as well as those admitted and uncontested in the pleadings. [Citations.] The court must consider all evidence set forth in the parties’ papers, and summary judgment is to be granted if all the papers submitted show there is no triable issue of material fact in the action, thereby entitling the moving party to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).)” (Committee to Save the Beverly Highlands Homes Assn. v. Beverly Highlands Homes Assn. (2001)
On appeal, we conduct a de nova review of the record: “We examine the evidence and independently determine its effect. [Citation.] We must uphold the judgment if it is correct on any ground, regardless of the reasons the trial court gave. [Citation.]” (Committee to Save the Beverly Highlands Homes Assn. v. Beverly Highlands Homes Assn., supra,
The same principles apply in the insurance context if the evidence established as a matter of law that Lloyds’s contamination products insurance policy does not provide coverage to Windsor: “ ‘We apply a de nova standard of review to an order granting summary judgment when, on undisputed facts, the order is based on the interpretation or application of the terms of an insurance policy.’ [Citations.] [1] In reviewing de nova a superior court’s summary adjudication order in a dispute over the interpretation of the provisions of a policy of insurance, the reviewing court applies settled rules governing the interpretation of insurance contracts.” (Powerine Oil Co., Inc. v. Superior Court (2005)
Having independently reviewed the parties’ combined separate statements, we conclude there is no evidence of material facts in dispute. The uncontradicted evidence establishes that Westland’s ground beef was the subject of a voluntary class II USDA recall because of potential risk from the use of downer cattle not because of contamination or tampering. In any event, there was no contamination or tampering. Windsor participated in the recall but no one suffered any illness or injury. Lloyds rejected Windsor’s claim for recall damages because the contamination products insurance policy did not provide recall coverage.
In view of the undisputed facts, our task is to apply the three-step process for interpretation of an insurance contract to decide whether there is coverage. (AIU Ins. Co. v. Superior Court (1990)
Under the first-party policy in this case, after Lloyds explained its reason for denying coverage, Windsor had the burden “ ' “to prove that an event is a claim within the scope of the basic coverage.” ’ ” (Central Nat. Ins. Co. v. Superior Court (1992)
The parties, of course, disagree about how to interpret Lloyds’s policy. Beginning with the meaning of “Insured Product,” Windsor contends that losses caused by the recall qualify for coverage because, ultimately, Westland’s ground beef was an ingredient incorporated into Windsor’s final product. Lloyds counters that an ingredient is only covered once it has been incorporated into Windsor’s products. To use frozen burritos as an example, Windsor would propose that a frozen burrito made with adulterated ground beef is an insured product. Lloyd 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.
A policy provision is considered ambiguous when it is capable of two or more reasonable constructions. (Powerine Oil Co., Inc. v. Superior Court, supra,
We conclude the subject policy is not ambiguous. Unlike the dissent, we hold 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. Lloyds’s policy provides coverage for “Insured Products” and an “Insured Event.” An insured event involves product contamination or tampering. An “Insured Product” means “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 . . . .” (Italics added.) 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. (See
Furthermore, there is also no evidence of any contamination of or tampering with Westland beef. It is not disputed that Westland employees apparently mistreated animals at the slaughterhouse. However, the record establishes that the reason for the recall was Westland’s failure to notify the USD A about downer cattle and submit to an inspection, not because there had been tampering or contamination. It is therefore undisputed there is no evidence that the recall occurred because Westland employees tampered with or contaminated the ground beef supplied to Windsor.
When adulterated ingredients are supplied by a third party, as may have occurred here, the policy does afford coverage for accidental product contamination under section 5.1. The coverage only applies, however, if some injury occurs within 120 days of consumption of the product. In this case, no injury occurred within 120 days or at all. Therefore, according to the plain language of the policy, no insured event was covered under the policy. (See Fresh Express, Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, supra,
In the absence of any ambiguity in the insurance policy, we find it unnecessary to seek additional legal definitions or to consult the dictionary for the meaning of commonly understood terms like tampering, adulteration, alteration, or malicious. We also reject Windsor’s unsupported argument that any losses caused from tampering by a third party, which is discovered during the policy period, should be covered. Windsor cites no pertinent authority for this position.
Windsor offered no evidence proving it was entitled to coverage under the policy for accidental contamination or malicious tampering involving an insured product. Consequently, there was no breach of contract or implied covenant and no bad faith. (Waller v. Truck Ins. Exchange, Inc., supra,
Our conclusions in this case are supported by various federal authorities. In The Limited, Inc. v. Cigna Ins. Co. (E.D.Pa. 2001)
IV
DISPOSITION
The contamination products insurance policy issued by Lloyds did not cover Windsor’s losses caused by the voluntary recall of Westland’s ground beef. We affirm the summary judgment. Lloyds, the prevailing party, shall recover its costs on appeal.
McKinster, Acting P. 1, concurred.
Notes
The Underwriters of Lloyds of London policy is not a recall insurance policy. (Hot Stuff Foods, LLC v. Houston Cas. Co. (8th Cir. 2014)
Section 5.13, which is not at issue in this appeal, provides that “Product Extortion Demand” means “any threat or connected series of threats received by the Insured to commit Malicious Product Tampering for the purpose of soliciting money, securities or property.”
In its reply brief, Windsor incorrectly asserts that the definition of an insured product does not apply to malicious product tampering.
Dissenting Opinion
Dissenting. — As the moving party, the defendant has the burden of demonstrating there is no potential for coverage under the terms of its policy. (See Powerine Oil Co., Inc. v. Superior Court (2005)
We independently review a trial court’s interpretation of the terms of an insurance contract, pursuant to well-settled rules of contract interpretation. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004)
“ ‘The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [Citation.] Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’ [citation], controls judicial interpretation. [Citation.]” ’ [Citation.]” (E.M.M.I., supra,
“A policy provision is ambiguous when it is susceptible to two or more reasonable constructions. [Citation.] Language in an insurance policy is ‘interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract.’ [Citation.] ‘The proper question is whether the [provision or] word is ambiguous in the context of this policy and the circumstances of this case. [Citation.]’ ” (E.M.M.I., supra,
“Ambiguity ‘ “ ‘is resolved by interpreting the ambiguous provisions in the sense the [insurer] believed the [insured] understood them at the time of formation. [Citation.] If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist. [Citation.]’ ‘This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, “the objectively reasonable expectations of the insured.” ’ ” [Citation.] “Any ambiguous terms are resolved in the insureds’ favor, consistent with the insureds’ reasonable expectations.” ’ [Citation.]” (E.M.M.I., supra, 32 Cal.4th at pp. 470-471.)
The policy provisions at the heart of the dispute are sections 5.7 and 5.10.
“5.7 ‘Insured Products’ shall mean 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 including any new products which QBE has accepted in writing as a new product under Clause 4.5.”
“5.10 ‘Malicious Product Tampering’ shall mean the actual or threatened intentional, malicious and illegal alteration or adulteration of the Insureds Products whether in conjunction with a Product Extortion Demand or not so as to give the Insured or consumers reasonable cause to consider the Insured Products unfit or dangerous for their intended use.”
The majority believes these provisions are clear and that no ambiguity exists. As stated by the majority; “Lloyds’s policy provides coverage for insured products and an insured event. An insured event involves product contamination or tampering. An ‘Insured Product’ means ‘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 . . . .’In plainer language, [plaintiff and appellant Windsor Food Quality Company, Ltd.,] must show there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.” (Maj. opn., ante, at p. 1186.) I believe this is incorrect.
I do not believe the majority is properly construing the policy. In my mind, the policy does not clearly and explicitly state what the majority says it does. Within the context of the present matter, the more reasonable reading of the
Looking first to section 5.7, it provides; “ ‘Insured Products’ shall mean 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 including any new products which QBE has accepted in writing as a new product under Clause 4.5.”
In interpreting this section, the majority has focused on the words “once incorporated therein,” and concluded that this provision can be interpreted in only one way — “Windsor must show there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.” (Maj. opn., ante, at p. 1186.) This interpretation is internally inconsistent.
By stressing the words “once incorporated therein,” the majority is interpreting the above section 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). 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. While I am not familiar with the production of frozen burritos, I would think that the various ingredients of the burrito are at some point in time separate from each other or have been blended together without yet being placed into the tortilla. By adopting the majority’s emphasis on “once incorporated therein,” the meat or any other ingredient could be tampered with during the production process but before being “incorporated” into the burrito; as such, the adulteration would not be a covered loss. (The adulteration of the meat occurring before it was “incorporated therein.”) As a result, the “once incorporated therein” language as interpreted by the majority is in conflict with the other portion of the majority’s conclusion — that the tampering is covered if it occurs “during . . . manufacture.” (Maj. opn., ante, at p. 1186.)
If the ingredients have to be “incorporated therein” before the adulteration is covered, by definition adulteration that occurs “during” the production process is not covered because the ingredient has yet to be incorporated
Further, if we are to accept the general premise of the majority that coverage exists only for adulteration “during or after manufacture,” one would have to conclude that the majority is not only reading out of section 5.7, “including their ingredients and components once incorporated therein” (because as previously explained adulteration can occur during the manufacturing process yet before the ingredient has been incorporated therein), but also reading into section 5.10, occurring “during production, manufacturing, packaging or distribution” (maj. opn., ante, at p. 1186). To reach the majority’s interpretation of the words “once incorporated therein” and that the adulteration must occur during or after the manufacturing process, the two clauses by necessity would have to read as follows:
“5.7 ‘Insured Products’ shall mean all products including their ingredients and eompenents-once-incorporatcd therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured including any new products which QBE has accepted in writing as a new product under Clause 4.5.”
“5.10 ‘Malicious Product Tampering’ shall mean the actual or threatened intentional, malicious and illegal alteration or adulteration of the Insureds Products [during production, manufacturing, packaging or distribution] whether in conjunction with a Product Extortion Demand or not so as to give the Insured or consumers reasonable cause to consider the Insured Products unfit or dangerous for their intended use.”
It is only after these modifications are made, that the policy can be plainly interpreted as the majority wishes.
Lastly, even language that may be plain and clear, as suggested by the majority, may be found as ambiguous when read in the context of the policy and the circumstances of the case. Here, the insured is Windsor Quality Food Company, Ltd., along with various named subsidiaries and divisions. As set forth in defendant’s undisputed statement of facts, No. 2, “[p]laintiff is a leading manufacturer and marketer of frozen ethnic foods, appetizers and other products [sic] food products purchased by consumers.” Within the context of the policy and the circumstances of the case, each party to the insuring agreement should well recognize that the insured produces and manufactures frozen foods. Perhaps with some exceptions, frozen ethnic
Simply stated, the phrase “once incorporated therein” found in section 5.7, does not modify when the tampering must occur, but rather when the adulterated ingredient becomes covered. Section 5.10 thereafter provides that the “Insured Product” must be “maliciously and illegally] alter[ed] or adulterated].” Section 5.10 does not provide a time constraint as to when the alteration or adulteration must occur. The adulteration of the ingredient can occur before it is incorporated into the product, but only becomes covered once it is incorporated into the product.
Taken together and reasonably read as a whole, the policy covers the present adulteration.
The majority relies on a number of cases which I believe are not applicable. It first references Caudill Seed & Warehouse Co. v. Houston Cas. Co. (W.D.Ky. 2011)
The majority relies on Ruiz Food Products v. Catlin Underwriting U.S., Inc. (E.D.Cal., Sept. 13, 2012, No. 1:11-cv-00889-BAM)
In sum, I do not believe the relevant policy provisions have the clear and explicit meaning that is placed upon them by the majority. When viewing the circumstances of the case, and sections 5.7 and 5.10 when read together, the policy provides coverage for adulteration of those individual ingredients incorporated into the product, with no time constraints as to when the ingredient must be adulterated.
All told, I believe triable issues of material fact remain as to whether coverage exists for plaintiff’s losses.
Appellant’s petition for review by the Supreme Court was denied May 20, 2015, S225719.
At trial, the plaintiff insured has the burden of demonstrating the potential for coverage under the terms of the policy. (Aydin Corp. v. First State Ins. Co. (1998)
It is speculative to assess what the insurer believed the insured understood as to the scope of the coverage in that the present record does not contain any extrinsic evidence relevant thereto.
In looking at the mutual intention of the parties, I do not think the parties intended not to have covered adulteration during production.