On 9 October 2015, summary judgment was ordered against insurers in the coverage case of Foster Poultry Farms v Certain Underwriters at Lloyd's.  This decision of a Californian district court, applying New York law, deserves the attention of all those involved in Contaminated Products insurance underwriting and claims.

Background

The background facts are widely-known, and can be summarised simply.  In 2013, Foster Farms ("Foster") became implicated in an outbreak involving Salmonella Heidelberg, one of over 2,500 Salmonella serotypes.  More than a dozen US states were affected.  Later, on 7 October 2013, the US Food Safety and Inspection Service ("FSIS") served a Notice of Intended Enforcement on Foster, referring to concerns about Foster's inadequate Salmonella control, as well as various sanitation issues.  There followed various measures, including a phase of intensified Salmonella sampling of Foster's consumer-ready packaged chicken.

On 6 December 2013, FSIS issued a Letter of Concern to Foster, highlighting that current levels of positive results were still high, including in "products related to … outbreak clusters associated with … Salmonella Heidelberg".  This letter also remarked on a high number of sanitation issues, and asserted some of them "may directly or indirectly contribute" to Salmonella.  The numerous sanitation issues included live cockroaches.

Cockroaches were observed again on 28 December and 7 January 2014.  On 8 January, there was a further sighting, and this provoked a Notice of Suspension the same day.  The Notice referred to "egregious insanitary conditions", allegedly demonstrating that Foster had "failed to prevent conditions that could lead to insanitary conditions, where products may have been rendered adulterated and/or injurious to health."  The Notice also asserted that "cockroaches and other pests can transmit … bacteria … increasing the chances of product contamination rendering the product unsafe".

The facility resumed operations on 22 January 2014, but Foster was not permitted to sell 1.3 million pounds of chicken, which had been produced on 7 and 8 January.  Foster incurred substantial losses, and claimed under its Product Contamination policy for losses including over $8m in loss of profits, and more than $4m for increased cost of working.  It also claimed against its pest control consultant.

Insurers declined the claim on multiple grounds, including (for Accidental Contamination) lack of evidence that destroyed product was actually contaminated, lack of injury risk, and (for Government Recall) lack of a recall.

Judgment

The Court decided in favour of Foster, and its findings included the following:

  1. the relevant production errors were Foster's failures to comply with sanitation requirements;
  2. the policy did not expressly require evidence of actual contamination, for example a positive test result, but in any case there was such evidence, as three out of eight test results on 8 January 2014 were positive for Salmonella;
  3. the use of regulatory "reasonable probability" language in the Government Recall endorsement influenced the meaning of the Accidental Contamination requirement that product "would" lead to bodily injury;
  4. "bodily injury" was not defined, and New York law considers it to include pure emotional injury (which, Foster argued, any consumer would suffer); and
  5. under Government Recall, the word "recall" was not defined, so was interpreted broadly, to include withholding from commerce.

Analysis

The Court appeared to be guided by a broad, simple view that Foster had probably made harmful product.  It may have been influenced by Foster being implicated in outbreaks of Salmonella Heidelberg (before and after January 2014), and appeared to consider that this strain can survive heating to the recommended temperature of 165F.  The evidence also suggested insurers had decided not to exclude Salmonella risk.

Numerous questions arise from this summary judgment.  For example, it is not clear what precisely the Insured Event was.  The importance of identifying the event is obvious, as it determines policy attachment, notification duties, and the starting point for time-limited cover.  One interpretation of the Court's decision is that the Insured Event error was failure to comply with sanitation conditions on 7 and 8 January 2014.  However, the coverage status of similar errors, which had been occurring during several months before this, appears not to have been fully addressed.

Furthermore, on the question of whether actual contamination was required, the policy had several relevant provisions that were not referred to in the judgment, including:

a) the Insured Event was entitled "Accidental Contamination", and there was no policy provision saying that headings and titles were irrelevant to interpretation;b) aggregation for Accidental Contaminations depended on whether each "contamination" was caused by or contributed to by the same error; andc) there was a condition precedent requiring samples of Insured Product to be retained to assess whether there had been an Accidental Contamination.

Moreover, it is not clear whether the Court considered the risk of harm existed because of Salmonella, or Salmonella Heidelberg in particular.  FSIS tolerates a certain level of Salmonella in raw chicken, and does not consider this to be an adulteration, for reasons including that it is practically unavoidable, and should also be eliminated by cooking to 165F.  If any and all presence of Salmonella in raw chicken is a coverage trigger, this may be concerning for insurers.

Next steps

Even though the Court found in favour of Foster, there may be arguments on causation and quantum.  Interesting questions could include the date of the Insured Event, and the extent to which loss might have been caused by any policy breaches on the part of Foster.

In any event, the judgment leaves open a number of key coverage questions, a few of which we have highlighted above.  Contaminated Products insurers would be well-advised to review wordings and exposures, particularly regarding Salmonella risk.