A wide number of companies have been in the news in recent months as a result of food contamination or food recall events. However, such problems are not isolated to companies with poor safety records or lackadaisical quality controls. In fact, a report issued by Swiss Re, the international reinsurer, has found that the number of United States food recalls—and the costs associated with those recalls—have nearly doubled since 2002. And this is a trend that is likely to continue as the food industry becomes increasingly integrated, the regulatory requirements become increasingly complex, and infectious diseases become increasingly drug resistant. Accordingly, all companies involved in either the food or health supplement industry must plan not for “if,” but “when” a recall is necessary.
To this end, insurance should be a key component of every company’s risk management strategy, and there are a number of specific insurance products on the market to assist. For example, a number of insurers have started marketing policies to “food and beverage” companies that purport to provide coverage for “accidental contamination” and/or “recall.” Unfortunately, these products have only recently been tested in the courts, and policyholders have been generally disappointed to learn that these policies do not provide the breadth of coverage expected.
For example, in Fresh Express Inc. v. Beazley Syndicate 2623/623 at Llyod’s, 131 Cal. Rptr.3d 129 (Ct. App. 2011), a California court of appeals held that a policyholder was not covered for a government-requested recall of its fresh spinach, because it was ultimately established that Fresh Express’s products were safe and that the E. coli contamination was limited to its competitor’s products. Therefore, although Fresh Express had acted at the direction of government regulators and in the best interest of the public, it nevertheless was unable to access its insurance coverage.
Wornick Co. v. Houston Casualty Co., No. 1:11-cv-00391, 2013 U.S. Dist. LEXIS 62465 (S.D. Ohio May 1, 2013), is a second example of a policyholder not being able to access its coverage despite its loss arising from a government-requested recall. In Wornick, a producer of “Meals-Ready-to-Eat” (“MREs”) for the government was required to issue a recall because an ingredient in one of the MREs’ components had been recalled for salmonella. Nevertheless, the Wornick court ruled that the policyholder’s MREs were not “contaminated” nor “impaired” because it could not be established that the supplier’s product actually tested positive for salmonella.
In a third case, a policyholder was determined to have no coverage because although its product tested positive for listeria, the strain of listeria was ultimately determined not to be harmful to humans if consumed. Little Lady Foods, Inc. v. Houston Cas. Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011). Therefore, once again a company that acted prudently by withdrawing a product from the market that had tested positive for potentially harmful bacteria was ultimately surprised to learn that its “accidental contamination” coverage did not insure its substantial losses.
However, the case law is not all bad. In a matter litigated by this author, a federal district court determined that a chicken producer was covered for both “accidental contamination” and “government recall” when the government refused to apply the mark of inspection to product within its facility because of poor pest control and sanitation conditions. Foster Poultry Farms Inc. v. Certain Underwriters at Lloyd’s, London, No. 1:14-cv-953 (E.D. Cal. Jan. 20, 2016). The court ruled that the language in Foster Farms’ policy did not actually require “contamination” but only an “error” in the manufacturing process, which itself was self-evident based on the government’s refusal to apply its mark of inspection. Furthermore, the Foster Farms court held although the affected product had not left Foster Farms’ possession, its destruction still constituted a “recall” because this term had not been defined by the insurer, and a policyholder should not be required to endanger public safety in order to secure its insurance coverage. The lesson of Foster Farms is two-fold:
- First: Policyholders should not accept conventional wisdom, but instead consult with experienced coverage counsel.
- Second: The language used in the policy is critically important, with subtle differences potentially being determinative of coverage.
This second point should be considered not only when a claim arises, but when the policy coverage is purchased and renewed. As the case law develops and insurers compete with each other for market share, the language of first-party food liability coverage is likely to change significantly in the next couple of years. Simply buying coverage “off the rack” may result in a policyholder not securing the coverage it intended.
Instead, a policyholder should:
- Carefully evaluate its risks:
- Could potential loss emanate from suppliers’ conduct or the conduct of the supplier’s supplier?
- What are the chances of unfounded adverse publicity?
- Will government regulators “order” a recall or only suggest one?
- Could loss result from an innocuous mistake in quality control testing and/or documentation?
- Consult with food liability insurance specialists who can identify potential gaps in coverage based on the policyholder’s particular risks.
- Push its insurers for more expansive coverage, while also remembering to identify any past losses, because misstatements in an application may serve as the basis for rescinding coverage.
An ounce of prevention at the time a policy is purchased is worth a pound of coverage when a contamination event occurs or a recall is required.