Food Fight: Chicken Producer Awarded Coverage Under Accidental Contamination and Government Recall Coverage Parts

In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd’s, London, Civil Action No. 1:14-953, 2015 U.S. Dist. LEXIS 138609 (E.D. Cal. Oct. 9, 2015), the Eastern District of California, applying New York law, granted plaintiff-chicken producer Foster Poultry Farms’ (“Foster”) motion for partial summary judgment on its declaratory relief action, and denied the defendant-insurers (“Lloyd’s”) motion for summary judgment on both of Foster’s claims.

11-19During the relevant policy period, the United States Department of Agriculture Food Safety and Inspection Service (“FSIS”) issued a Notice of Intended Enforcement (“NOIE”) to withhold marks of inspection for products produced at Foster’s facility, making the chicken products ineligible for sale. As a result, Foster destroyed 1.3 million pounds of chicken. Foster then submitted a claim to Lloyd’s seeking coverage under its product contamination policy for over $12 million in expenses associated with the destruction of the chicken. The policy provided coverage for all “loss” arising out of “insured events,” the two of which at issue in this case were “accidental contamination” and “government recall.” Lloyd’s denied coverage under both provisions of the policy, leading Foster to file an action for declaratory relief and breach of the insurance contract.

On cross-motions for summary judgment, the Court first found that coverage existed under the Accidental Contamination provision of the policy, which provided coverage where Foster could demonstrate “(1) an error in the production of its chicken product, (2) the consumption of which ‘would lead to’ bodily injury.” The first step was established by Foster’s failure to comply with federal sanitation regulations, which resulted in a high frequency of salmonella in the finished chicken products and an outbreak of salmonella illness in the community. The court found compliance with the federal regulations was “vital to controlling food safety hazards during [food] production,” and a failure to do so therefore constituted an “error” in the production of the chicken product.

The second element required showing that the “‘erroneously produced’ chicken product ‘would lead to bodily injury, sickness, disease or death.’” Lloyd’s denied coverage on the basis that Foster had to prove actual contamination of the chicken in order to establish that consumption would be harmful. While Lloyd’s cited heavily to cases that validated denials of coverage due to an insured’s inability to prove actual contamination, the Court determined these cases were distinguishable from Foster’s because coverage under Foster’s policy was triggered by an error in production, not actual contamination. The Court noted, however, that even if Foster’s policy did require actual contamination, that requirement would have been met, because it was undisputed that Foster’s chicken product consistently tested positive for salmonella in the six months prior to its destroying the product for which it sought coverage.

Lloyd’s also argued that the presence of salmonella did not by itself render the product harmful because normal cooking practices would destroy the salmonella organism. The Court rejected this argument, as FSIS identified the Foster facility as the likely source of a salmonella illness outbreak in over two hundred people from fifteen states across the country. Finally, Lloyd’s argued that the policy language required Foster to demonstrate a causal link between its “error” and injury that would have resulted from consuming the product. The court rejected this argument, finding Foster only needed to prove that an error occurred and that the product would have caused harm if consumed, as the provision did not use any causation language. The Court therefore granted Foster partial summary judgment on the accidental contamination policy.

The Court also granted Foster’s motion for partial summary judgment on the government recall provision. The Policy provided coverage for “a voluntary or compulsory recall of Insured Products arising directly from a Regulatory Body’s determination that there is a reasonable probability that Insured Products will cause ‘serious adverse health consequences or death.’” Lloyd’s denied coverage because Foster’s destruction of its product did not constitute a “recall” given that the chicken never left Foster’s control and was never introduced into the stream of commerce. Foster argued that the destroyed chicken had been recalled because the policy’s definition of pre-recall expenses included ascertaining whether the product was contaminated and the potential effects of such contamination, and recall expenses included destroying contaminated products without mention of who was in possession of the product. The Court found both interpretations of the term were reasonable, but because the term was subject to more than one interpretation it was deemed ambiguous, and the contract was thus interpreted in favor of Foster as the insured.

As the body of case law interpreting the newer wave of specialty policies in the food and beverage industry continues to grow, it is extremely important for insurers to analyze the specific policy language and recall/contamination scenarios at issue in those cases when evaluating coverage under their own policies. This particular case has some interesting takeaways on issues such as causation and ambiguity that should guide us going forward.