Wildfires in August 2020 negatively impacted the grape harvest. The majority of Constellation’s (STZ) annual grape requirements are satisfied by supply contracts from independent growers. The contracts allow Constellation to reject grapes that do not meet required quality specifications, including from smoke damage.

Even with the right to reject, it’s now clear that Constellation is not always able to determine whether grapes have been damaged until after they’re accepted and turned into wine.

“We test the grapes acquired under our supply contracts for smoke damage and other issues prior to accepting them. During the production process, previously undetected smoke damage could create quality issues that may result in additional write-downs of certain bulk wine inventory in future periods.”

The latest 10-Q also reiterates the uncertainty surrounding supplier contracts which hints at potential future legal battles.

“We continue to assess when to use our rights under law and our supply contracts to reject grapes that are damaged from wildfires.”

Constellation also owns vineyards which are insured. However, a change in the language in this quarter’s 10-Q raises questions over whether Constellation will recover any of the losses. In the previous quarter’s 10-Q, STZ suggested it would recoup some of the loss:

“We also have insurance coverage that partially covers losses for grapes in our own vineyards.”

In the latest 10-Q, STZ includes additional detail indicating it may not be as confident in recouping losses as it was ninety days ago.

“We have insurance coverage that partially covers losses for grapes in our own vineyards. While we are pursuing reimbursement from our insurance carriers, there can be no assurance there will be any recoveries.”

In the current quarter, STZ recognized a $26.5 million loss in connection with the write-down of certain grapes as a result of smoke damage. This suggests that six months after the wildfires, STZ has yet to recoup insured damages. Historically, smoke taint damage claims have dragged on for years as insurers push back, arguing grapes on-the-vine are not covered. Coupled with the new warning language, investors should lower their expectations for recovery.