California Court of Appeals, Fourth District, Second Division
APPEAL from the Superior Court of San Bernardino County No. CIVRS905013 Keith D. Davis, Judge.
Shernoff Bidart Echeverria Bentley, Michael J. Bidart, Ricardo Echeverria, Steven Messner; The Ehrlich Law Firm and Jeffrey Isaac Ehrlich for Plaintiff and Appellant.
Hamrick & Evans, A. Raymond Hamrick, III and Douglas K. Lackey for Defendants and Respondents.
Plaintiff and appellant Windsor Food Quality Company, Ltd. (Windsor) manufactured Jose Ole frozen food products, using ground beef supplied by Westland/Hallmark 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,  issued by defendants and respondents-QBE Insurance (Europe) Limited and the Underwriters of Lloyds of London (Lloyds). After Lloyds denied coverage on various grounds, Windsor sued for breach of contract and bad faith. The trial court granted Lloyds’s summary judgment motion, finding no triable issues of material fact and no coverage.
Windsor appeals, arguing tat 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
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.” On July 7, 2008, based on section 5.1, Lloyds denied Windsor’s claim for “Accidental Product Contamination, ” which “would lead to or has led to bodily injury, sickness, or disease of any person, animal or livestock physically manifesting itself within 120 days of its consumption or use.” It is not disputed that there was no actual injury to consumers from Westland beef within 120 days.
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 “[t]here 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, “‘[t]here 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
Manuel Martinez-that they had no information about intentional or malicious contamination or extortion involving Windsor’s products. Windsor responded that Lloyds was not presenting a fact but arguing a legal conclusion. Lloyds objected to the relevance and admissibility of evidence submitted by Windsor to establish that “rogue employees” had contaminated Westland’s ground beef. In a videotape recording, two Westland employees were shown pushing downer cows with a forklift, shocking them with an electric prod, and spraying them with water to get them on their feet. The men were charged with felony animal cruelty.
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, Lloyd responded to ...