Insurance Coverage Alone Does Not Guarantee Complete Protection

By MICHAEL CHILDRESS

In early July of 2001, George Richter, president of leading U.S. meat producer, Farmland Foods Inc., was in the midst of leading his company in the expansion and renovation of its 650,000 square-foot processing facility in Albert Lea, Minn. Company progress at the time was very strong and the upgrade of the massive plant was expected to propel Farmland toward even greater growth.
The facility, built in 1912, served as a production center for bacon and ham – two products that accounted for 62 percent of Farmland’s annual revenue. Under Richter’s guidance, it would soon replace the company’s Carroll, Iowa, plant and become Farmland’s headquarters for the two products, producing more than five million pounds of meat each week. On July 8, 2001, however, with the expansion project 50 percent completed, Richter received the devastating news that a fire, inadvertently ignited by one of the contractors working on the expansion project, had consumed the Albert Lea facility.

“We had already invested so much capital in the Albert Lea plant upgrades, and all of that was lost,” said Richter. “Additionally, bacon and ham are our company’s two highest margin products, and the fire cost us 30 percent of our production and a significant opportunity to capture additional market share. Still, we were very fortunate that none of our 550 plant employees or any of the contractors lost their lives.”
Farmland had protected itself against such a disaster with a comprehensive, $500 million “all risk” insurance policy on its plants, including the Albert Lea facility. What it would quickly discover, however, is that insurance alone does not guarantee complete protection.

Preserving Insurance Benefits
Immediately following the fire, Farmland intended to take whatever steps were necessary to restore the Albert Lea facility and reopen it for business.
At the time of the fire, the company was leasing the property with an option to buy. Farmland’s landlord, acting in what it perceived to be its own best interests, moved to terminate the lease and trigger the option, thereby nullifying the company’s ability to recover rental payment insurance benefits and leaving Farmland as the owner of a distressed property.
Farmland retained a law firm to create a solution that worked for the landlord, while at the same time, preserved Farmland’s insurance policy benefits. Attorneys were able to meet with Farmland’s landlord the week after the fire and strike a deal whereby it would continue the company’s lease on the property, thus preserving Farmland’s insurance benefits.

Surveying the Damage
The law firm coordinated all cleanup activities for the Albert Lea facility, taking special care to ensure that pertinent evidence was preserved and documented. The firm also called in outside experts in the fields of structural engineering, food safety and mycology to inspect the remains of the plant and determine the feasibility of restoring it to working condition. After a tour of the facility, however, it quickly became clear that reopening the meat processing plant – in light of both Farmland and the USDA’s stringent standards for food safety – would be impossible.
“When we inspected the Albert Lea facility, we found severe structural, smoke, and water damage,” said Richter. “Additionally, we found that nearly one million pounds of meat in various stages of processing had been ruined. The structural damage made it impossible to get inside some sections of the facility for weeks to remove much of the ruined meat. Obviously, that much spoiled meat sitting in an open area during a hot, humid summer presented huge problems in terms of contamination.”
In fact, this contamination became Farmland’s biggest challenge. Ankle-high standing water, a byproduct of the firefighter’s use of nearly 3 million gallons of water to combat the fire, combined with the spoiled meat and summer weather, provided an ideal breeding and feeding ground for fungi, rats, flies and maggots. Additionally, the city of Albert Lea’s sewer system was unable to handle the massive amounts of water and debris that the fire produced; the city ordered Farmland to plug its sewers and drains to prevent additional drainage from the facility. This turned the plant and its property into a virtual cesspool of contamination as raw sewage, animal fats, animal blood, ammonia used for meat refrigeration, and bacteria seeped into the soil.
After touring the Albert Lea facility and consulting with experts, it was determined that although the fire had destroyed only 30 percent of the structure, the building was a “total loss” in terms of future usability. Under the city of Albert Lea’s order, it would have to be condemned and demolished. Any food processing plant must comply with USDA standards in terms of cleanliness and safety, and the fire had exposed even areas that were not burned to long-term contamination.

Arguing a ‘Total Loss’
Acting on the advice of its experts who had deemed the Albert Lea plant a total loss, the law firm coordinated Farmland’s insurance claim presentation, seeking $125.1 million for the replacement of the Albert Lea facility, destroyed equipment, post-fire emergency building repairs and stabilization, and continuing rent on the property. The most compelling fact supporting Farmland’s claim was the now empty lot on which the demolished facility had once sat.
Farmland’s insurers, however, saw things differently, arguing that since only 30 percent of the facility had been damaged by the blaze, it was not a total loss and could have been reasonably repaired rather than being demolished. Ultimately, they used this argument to refuse Farmland’s claim, largely ignoring the fact that the city of Albert Lea, not Farmland, had ordered the plant razed.
In situations like Farmland’s, the insurance companies almost always have the upper hand. Most policyholders leave it to the insurer to determine how much of a claim should be paid in the event of a loss. In the event of a dispute, the insurer again has all of the power, with vast experience in insurance litigation and unlimited access to the expertise and resources necessary to successfully litigate any claim.
In the Farmland Foods matter, the company’s decision immediately following the fire to retain the services of a law firm that helped level the playing field between Farmland and its insurers.
In the absence of experienced legal counsel, Farmland might have been forced to accept the position of its insurers. Instead, it was able to challenge them to an eventual stalemate. On the verge of bringing the matter to litigation, Farmland and its insurers agreed to participate in a two-day mediation.
Negotiating a Settlement
During mediation in San Francisco, Farmland’s position was that it would be unreasonable to expect the company to risk the health of its valued consumers, as well as the civil, criminal, and business liabilities potentially associated with the production of adulterated meat by a “repaired” facility. Following a lengthy session, a settlement of Farmland’s claim on the Albert Lea facility was reached for a total of $63 million, well above the $28 millions that insurers had originally offered.
The settlement was ultimately fair to both parties. Most importantly, it enabled Farmland to move on from this disaster and focus on resuming normal operations. Additionally, it enabled the insurers to avoid a the potential risk of losing this matter in a courtroom setting.

Proactive Disaster Planning a Necessity
While the law firm ultimately succeeded in helping Farmland garner an equitable insurance settlement, the situation brings into clear focus the need for companies to proactively protect themselves against potential disaster situations.
Once an unforeseen incident occurs, it is often too late to think of all of the details that a comprehensive loss management program would have covered. In Farmland’s case, with the law firm retained after the fire, attorneys had to quickly obtain copies of all nine of its insurance policies and lease agreements, evaluate them, and formulate the best possible client solution. Had the firm been working with Farmland prior to the incident, all appropriate documents would have been on file and subjected to a pre-loss policy analysis that identifies potential areas of exposure and ensures that a policyholder receives maximum coverage in the event of a crisis.
Having a loss management program in place prior to the fire would have also enabled attorneys to take a more aggressive position with Farmland’s insurance providers and guide the company through the claims process much more rapidly.
Attorneys would have also been able to sit down with Farmland’s insurers prior to the disaster occurring. It is very likely this matter would have been resolved in far less than the two years it ultimately took. In fact, with the law firm and insurance companies working together from day one, Farmland’s case would have likely never headed down the path toward litigation. A simple pre-loss communication between all parties would have made for a much more amicable resolution.

Michael Childress is a founding shareholder of the law firm of Childress Duffy Goldblatt Ltd. and leads the firm’s loss management group. His expertise encompasses the fields of insurance coverage, business litigation involving shareholder rights, commercial losses, and real estate transactions. Childress received his bachelor’s degree from Marquette University in Milwaukee in 1977, and his Juris Doctor from Chicago’s John Marshall Law School in 1981. He is also a member of the Chicago Bar Association, the Illinois State Bar Association, and the American Trial Lawyers Association.

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