Food Court Report: Food Recall Insurance - A Case Study
Food Recall Insurance: Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd's, London, 2015 U.S. Dist. (U.S. District Court for Eastern District of California, October 9, 2015)
A recent decision interpreting a "food recall" insurance policy (technically a product contamination insurance policy or "PCI" for short) provides guidance for food companies selecting food recall insurance policies or in seeking coverage on a food recall claim. Foster Poultry Farms (Foster) involved a dispute between a poultry producer and its insurer, XL Catlin, over the terms of the PCI policy. This decision provides at least two helpful takeaways for PCI policyholders: (1) that regulatory noncompliance, at least under the XL Catlin policy, could be enough to trigger "accidental contamination" coverage; and (2) the "government recall" endorsement provision on the PCI policy could indirectly serve to lower the policyholder's bar to trigger "accidental contamination" coverage.
In the Foster case, the U.S. Department of Agriculture Food Safety and Inspection Service (FSIS) issued a series of enforcement actions against Foster. Among other things, FSIS noted in its inspection records and in its Notice of Intended Enforcement (NOIE) and Notice of Suspension (NOS) that Foster's facility had a high prevalence of salmonella and noncompliance with federal sanitation regulations. As a result of the FSIS actions, Foster ended up destroying 1.3 million pounds of chicken before it left the processing facility. Foster claimed coverage under the "Accidental Contamination" and "Government Recall" trigger provisions for its costs incurred in responding to the enforcement actions. When XL denied coverage of the claims, Foster brought suit seeking declaratory relief and asserting breach of contract.
The XL Catlin PCI policy defines "Accidental Contamination" as an error in the production, processing, or preparation of the products "provided that" their use or consumption "has led to or would lead to bodily injury, sickness, disease or death." The court first noted that FSIS's NOIE and NOS, which documented that Foster "incorrectly" or "mistakenly" implemented measures required by sanitary regulations, were sufficient to show an "error" in the food production. In responding to XL's claim that Foster had not met the burden of showing a causal link between Foster's error and the resulting injury from consumption of the products, the court found that there was no such requirement. In the court's view, Foster only needed to show that there was an error in the production and that "the products" (the contaminated chicken) would have caused harm if consumed. One takeaway here is that regulatory noncompliance, such as violations of sanitary regulations documented by a regulator's inspection records, was enough to trigger "Accidental Contamination" coverage, at least under the XL Catlin PCI policy.
Also interesting in this case is that, in interpreting the phrase "would lead to bodily injury," the court referred to the "Government Recall" provision of the policy which only requires a "reasonable probability" that the product will cause "serious adverse health consequences or death" to trigger coverage. The court reasoned that since benefits under the XL "Government Recall" coverage and the XL "Accidental Contamination" coverage provisions "are congruent throughout much of the policy," Foster only had to meet the lower threshold burden of "reasonable probability" of injury instead of having to demonstrate conclusive evidence of injury. Thus, another takeaway from this decision is that policyholders should closely examine their "government recall" endorsement "injury" provisions as it may indirectly work to lower the policyholder's bar to trigger "accidental contamination" coverage.
This case serves as a good reminder to food companies of not only the necessity of maintaining 1st-party, 3rd-party liability and specialized "recall" insurance policies to address potential food recalls, but it underscores the importance of closely scrutinizing the language to ensure that such coverage will actually be triggered in the event of such a "food recall."