Just this last week, Lloyds of London underwriters argued before a California Federal Judge that Foster Poultry Farms can not meet their burden to prove the $14.2 million in damages stemmed “directly and solely” from the temporary shut down of its plant after government inspectors claimed it was unsanitary as is required under its insurance contract.
At its heart, this litigation focuses on the definition of “product recall” as the poultry producer seeks $14.2 million in claims arising from a government mandated shutdown of one of its plants.
Foster Farms initiated litigation by suing Lloyds of London (LOL.UL) in June 2015 claiming the closure and resulting product losses constituted a recall under the terms of its insurance policy.
Foster contends the closure and resulting product losses constituted a recall under the terms of its insurance policy. The insurers claim Foster Farms policy covered economic losses when the company called back its products from customers, not when the company destroyed products that it had not yet shipped to customers, as reported in case filings and briefs.
Foster Farms argues that the insurers are taking a too narrow view of the term “recall” and are inaccurately basing their decision on that ambiguous and “exceedingly narrow definition of the word ‘recall’ At issue is a Jan. 8 decision by the U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS) to issue a notice of suspension of Foster’s facility in Livingston, California, after it found cockroaches at the site.
The FSIS told Foster Farms to take a series of corrective actions, including disposing of 1.3 million pounds of chicken products, according to the amended complaint. The company said it complied. According to internal emails, letters and other court documents filed in the case, the insurers rejected the claims because Foster Farms did not initiate a recall of its chicken, either from retailer shelves or from customers’ warehouses.
This is where the definition of “recall” gets unclear and confusing. It is striking that Lloyds admits its definition of “recall” is not defined in its policy and yet, the nature of the litigation claims that to expand the definition beyond the common meaning is clearly misguided and Lloyds does not agree that any ambiguity exists.
Are we to conclude the definition was purposely ambiguous to protect Lloyds at the expense of the insured? That is the gist of this litigation and it will be interesting to watch as the case goes through the litigation process. In the meantime, we encourage all insureds to review their existing policies for similar ambiguity and seek clarification from counsel and the insurance companies.
As litigation on these type of definitional issues are driven by the Food Modernization & Safety Act it will become increasingly relevant. As a side note and in an effort to further put pressure on Lloyds, Foster Farms is now contemplating filing another insurance claim related to its recent voluntary recall of an undisclosed amount of contaminated chicken linked to a major salmonella outbreak.
This further stresses the definitional importance of a recall as Foster Farms it initiated the recall “in the fullest interest of food safety.”
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