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Foster Farms battles insurers over definition of 'recall'

By P.J. Huffstutter

CHICAGO (Reuters) - Foster Farms and its London insurers are facing off over the definition of "product recall" as the poultry producer seeks payment of $14.2 million in claims arising from a government-mandated shutdown of one of its plants, court documents show.

The company sued a group of Lloyd's of London [LOL.UL] underwriters in June, arguing the closure and resulting product losses constituted a recall under the terms of its insurance policy.

Foster Farms, one of the largest chicken producers in the United States, filed an amended complaint last Thursday in U.S. district court in Fresno, California, saying three insurance underwriters at Lloyd's acted improperly when they rejected its claims for the production stoppages in January.

The insurers said the 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, documents in the case show.

But Foster Farms argues that the insurers are inaccurately basing their decision on an ambiguous and "exceedingly narrow definition of the word 'recall'," according to the complaint.

The claims are against XL Syndicate, Ark Syndicate and Syndicate 1206, jointly referred to as "the London insurers," according to the complaint.

The three underwriters operate on the 326-year-old Lloyd's of London insurance market, a collection of about 90 competing insurers housed in a landmark building in the heart of London's financial district.

"We don't confirm or comment on clients or claims," XL Insurance said in a statement. Lloyd's of London and the other two underwriters could not be reached for comment.

ANOTHER INSURANCE CLAIM POSSIBLE

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.

Foster Farms, which had paid a premium of nearly $600,000 for a 12-month product contamination policy, then filed $14.2 million in claims for the lost products and other costs incurred from the stoppage.

But 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.

"We agree that ‘recall’ is not defined within our policy, however to attempt to expand the definition of this word beyond the common meaning is clearly misguided and we do not agree that any ambiguity exists," Jonathan Kelly, an XL Group claims manager, said in a letter to Foster Farms' legal team.

In the midst of the legal dispute, Foster Farmers says it is considering filing a new insurance claim related to its voluntary recall last week of an undisclosed amount of contaminated chicken linked to a major salmonella outbreak.

The company said it initiated the recall "in the fullest interest of food safety."

The case is Foster Poultry Farms Inc v. Certain Underwriters at Lloyd's, London, U.S. District Court, Eastern District of California, No. 14-cv-00953.

(Reporting By P.J. Huffstutter in Chicago; additional reporting by Richa Naidu in Bangalore; Editing by Steve Orlofsky and Ross Colvin)

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