If they don’t already have it, I advise my clients to talk with their insurance broker about purchasing recall insurance (otherwise known as product contamination insurance) . For clients who have recall insurance, I advise them to make sure the policy provides the coverage they expect. Recall insurance is a different animal than other policies like Commercial General Liability or Products Liability coverage. Food companies purchasing recall polices should consider the cost-benefit carefully and consider asking the underwriter to amend the policy where necessary.
The facts of a recall are often fluid and every company’s business is different. The facts known on the day a recall, a market withdrawal or another event involving product contamination occurs may be different than the facts known in the days, weeks or months that follow. In the event of a claim, the insurer is more likely to contest coverage under a recall policy than with other types of coverage.
So what should a food company should look at when purchasing, negotiating or renewing a recall or product contamination policy? The answer depends at least in part on the nature of the business and the exposure and expenditures that the business expects in the event of a recall or product contamination event.
Based on the various forms of coverage I've seen, here is a non-exhaustive list of issues to consider discussing with your broker:
o Class II or III Recall: Will the policy cover recalls where the likelihood of bodily injury is remote or non-existent, such as class II or class III recalls? What if the recall is requested (as opposed to ordered) by the FDA or other appropriate governmental agency?
o New Administrative Detention Rules: Will the policy cover loss from an FDA administrative detention? The new food safety laws lower the standard by which the FDA can administratively detain foods. Just last week the FDA released its proposed rule on administrative detention: it no longer needs evidence of serious adverse health consequences or death to detain foods.
o Mistaken Recall: What happens if loss is incurred due to a recall or other event and it turns out that the facts underlying the recall or other event turn out later to be incorrect? For example, a company issues a recall due to information that its product is contaminated and it later turns out that the information was incorrect and the product was not contaminated.
o Exclusion for Competitor's Product: Some policy forms exclude coverage if the recall or other loss was due to a problem with a competitor's product. This exclusion could be particularly problematic for those involved with selling commodities.
o Warranty of Fitness Exclusion: Some policy forms will exclude loss if the product breaches a warranty of fitness. The insurer may be trying to exclude manufacturing defects or other reasons for a product recall or market withdrawal other than accidental contamination. The problem is that the insurer could later argue that loss from a contaminated product or a product with an undeclared allergen is excluded because such a product would also breach a warranty of fitness.
o Third-Party Coverage: Does the policy provide coverage for claims by third parties (e.g., your customers)? If not, do you need that coverage and is it available?
o Lost Profits/Revenue: Does the policy cover your lost profits or lost revenue? If so, how is your loss calculated? Will you have sufficient documentation and evidence to prove loss in the event of a claim?
A 60-minute webinar broadcast on April 29 on the Food Safety Modernization Act (and a short discussion of implications of the Japanese earthquake, tsunami and resulting nuclear disaster on food safety) is available for replay at this link. The webinar was sponsored by AON. My gratitude to AON for inviting me to participate. As always, I'm interested in your feedback and questions.
I’ll be speaking at several events over the next two months on the Food Safety Modernization Act (FSMA) and how this comprehensive and far reaching legislation affects the status quo for food companies. Two of these events are free, and all promise to address relevant and critical issues for those involved in the food industry.
a. May 24 at Parker Smith Feek's offices in Bellevue for a discussion of the new FSMA, the Reportable Food Registry and how to survive a food product recall (event was rescheduled from March 22). Registration is free and coming soon. Contact me if you’re interested and I’ll get a spot reserved.
b. April 29 webinar sponsored by AON on FSMA. Link to the free registration is here.
c. May 12-14 Northwest Food Processors Association’s Executive Business Retreat in Coeur d'Alene, Idaho.
d. June 15-16 ACI Food Safety Regulatory Compliance Summit in Chicago. I'll be speaking specifically on "Curtailing Downstream Liability Arising Out of On-Site Inspections: How to Prepare and What to Do Should the Government Come Knocking." If you register by April 15, I can arrange for a discount. Just let me know.
If you can't make these events or would like a customized in-house presentation on FSMA, the Reportable Food Registry, recalls or other food liability topics, please let me know. Also, stay tuned for new blog entries addressing such topics as the Reportable Food Registry (RFR), restaurant menu labeling, and strategies to defeat food marketing/labeling putative class claims.
Marler Clark clients and the owners of the restaurant that sold MarlerClark's clients food they claim was contaminated with E.coli O111 joined forces against the restaurant's insurer. In the end, the peronsal injury plaintiffs and the restaurant insured convinced the United States District Court for the Northern District of Oklahoma on a Rule 56 summary judgment motion that a single E.coli outbreak constituted at least two separate "occurrences" under a commercial general liability insurance policy ("CGL") issued to the restaurant. The result was another $1 million in coverage available to pay claims. A copy of the court's opinion can be linked here.
The primary policy at issue limited the amount of insurance available to $1 million per occurrence ($2 million products-completed operations aggregrate). According to the court, the policy defined an "occurrence" as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” According to court's summary of the state health department's findings, the outbreak at issue included 341 persons, 60 confirmed, and 94 probable. The "point source outbreak" was from the Country Cottage restaurant. Though 21 persons did not dine at the restaurant, they were believed to be exposed at a church tea catered by the restaurant.
The court concluded that under Oklahoma law there are "two distinct places of injury and thus, two separate occurrences." The court explained that:
Looking for “the same temporal and spatial parameters” of an occurrence, the Court finds that the undisputed facts at least establish two separate occurrences of E. coli-induced illness covered under the policies: that resulting from the negligent contamination of food prepared and served at the Country Cottage restaurant and that resulting from the negligent contamination of food prepared and served at the Church Tea. Regardless of any temporal overlap between these two occurrences, the geographical distinction between the physical location of Country Cottage restaurant in Locust Grove, Oklahoma, and that of the Free Will Baptist Church in Broken Arrow, Oklahoma where the Church Tea took place is appreciable and, appreciatively, concrete.
For MarlerClark clients and the injured plaintiffs, the end result is another $1 million available to settle their claims. But is this a good result for the restaurant owners? The answer is maybe. Insureds should understand that the result may be a double-edged sword. On the one hand, another $1 million in indemnity is available to protect the owners' personal assets. On the other hand, if the insured had a large deductible or self-insured retention ("SIR"), two occurrences could mean two deductibles or two SIRs that need to be paid by the insured.
So why would an insured ever have a high deductible or SIR? The answer is that many food manufacturers and retailers maintain a high deductible or SIR in order to control the defense and settlement of the case and not hand over control to the insurer at the outset. Often, the insured's objective is to resolve the case in a way that best protects the client’s business and brand going forward. A conflict with the insurer arises because the insurer's objective is to resolve the case for the fewest dollars possible (combined payment of defense costs plus indemnity paid to the allegedly injured consumer).
Employers Fire Insurance Company has brought a declaratory relief action against Basic Food Flavors, Inc. in the United States District Court for the District of Nevada. Employers Fire says in its complaint that its policy "contain[s] certain terms, provisions, limits, conditions, exclusions and endorsements that limit or preclude coverage to Basic Food with respect to losses, costs or expenses incurred as result of the HVP Recall." The HVP recall referenced is the many food product recalls issued nationally as the result of hydrolyzed vegetable protein ("HVP") potentially contaminated with Salmonella Tennessee.
Click on the image of the complaint below to read it:
Neither a copy of the policy nor Employer's Fire rationale for "limits or preclusion" of coverage is yet available. However, this action should serve as a reminder for all food companies to review with their broker and insurance coverage teams their recall coverage. The HVP recall (like the PCA recall and other recent recalls) illustrates how big a financial impact a food recall can have. With the recall insurance market evolving rapidly (and with more options than existed a year or two ago), insureds should keep their brokers working hard to find appropriate (and afordable) coverage.
UPDATE: For those interested in reviewing the Axis policy discussed in the motion, it can be linked here.
I'm often asked in my practice about the availability of insurance coverage for claims by consumers or competitors that products are deceptively labeled, marketed or advertised. Those interested in the topic should follow the litigation between Welch Foods, Inc. and its insurers regarding coverage for the putative consumer fraud and the Lanham Act claims asserted against Welch’s over the marketing of its pomegranate-containing juice products.
No rulings have been issued as of yet. But one of Welch's insurers, AXIS Surplus Insurance Company, has taken the interesting position that the "Media Wrongful Act" coverage in its policy provides no coverage. According to Axis's Motion for Summary Judgment, "[i]n a covered Media Wrongful Act claim, the Loss arises from, and is actionable based on, the creation or dissemination of the advertising."
Axis argues that the underlying claims that Welch's marketing of its product created "confusion, deception and mistake in the pomegranate juice market" are not covered under the Media Wrongful Act coverage because "the POM Complaint does not allege that Welch’s liability results from a media liability — i.e., a harm created by the creation or dissemination of Welch’s advertising — but from a liability resulting from the sale of juice which does not live up to such advertising." Axis explains further that "if the product conformed to the standards set forth in the advertisements, the putative class would not have a claim against Welch’s."
How is Axis's reasoning not circular? Can't Welch's argue the reverse in an equally compelling way: That had the putative class or competition believed that the advertising conformed to the product, there would be no claims against Welch's?
Indeed, isn't the counter to Axis's "blame the product argument" more compelling because claims against the labeling of the product itself are subject to federal preemption, and, therefore, they could not be brought by the putative class or the competition? The putative class and competition can ONLY bring claims related to the advertising and marketing.
Can products packaged defectively for consumer sale really be usable? According to a recent case adjudicating commercial general liabilty ("CGL") and commercial umbrella insurance policies, products packaged in defective cans are not necessarily unusable.
In Silgan v. National Union Fire Insurance Co., Judge Hamilton from the U.S. District Court for the Northern District of California, recently ruled against Silgan, a can manufacturer, seeking insurance coverage for a $6.5 million customer claim arising from a large-scale food packaging failure. Del Monte made a claim against Silgan for $6.5 million because of a failure of four-ounce pull-tab cans of fruit. Del Monte consumers increasingly complained in 2005 that the pull-tabs broke.
The case is notable for a variety of reasons, as the court granted summary judgment against Silgan on several bases, including that the loss of fruit constitutes neither “physical injury to tangible property” nor “loss of use of tangible property that is not physically injured.” Joseph A. Arnold at Cozen O’Connor has an article discussing the ruling in full.
Judge Hamilton ruled that there was no "loss of use" coverage because there was no proof that the fruit inside the defective cans was “unusable.” The judge ruled that
without proof that the fruit itself was unusable, rather than proof that Del Monte made a business decision not to expend money on re-packaging the cans, plaintiff has not satisfactorily discharged its burden to establish that Del Monte lost use of its tangible property, such that qualifying “Property Damage” under the National Union Policy
But how can product canned for consumer sale not be unusable if the container fails? Implicit is a finding by the court that the fruit could have been repackaged for sale. But is it ever feasible to re-can fruit for sale? To answer this question I consulted nationally renowned food safety expert Gale Prince. As I suspected, Mr. Prince’s response was not consistent with the court’s ruling on usability:
If you open the containers you would have to reprocess the fruit. This would require heat. I would question the saleability of the reprocessed product after the addition[al] processing that would be required to achieve safety. The product would be expected to be mushy and discolored. You would expect a problem with organoleptic qualities. The economic cost of opening effective cans and processing [may] exceed the economic value of the resulting reprocessed fruit product.
Insureds can expect to see their carriers deny coverage coverage more frequently using National Union's "loss of use" argument. Though it may seem obvious how flawed the argument is, insureds cannot assume that either their insurers or the courts will see it that way. Retaining experts such as Mr. Prince and marshalling the case for unusability will be critical in securing coverage.
Take-Aways from November 3 Webinar: Making Good Marketing Claims: Product Labeling Pitfalls, Third-Party Certification and "Green Washing"
Tuesday, November 3, we held our second webinar in a three-part series on bringing sustainable food products to market. Thanks again to our presenters and attendees. The recorded webcast was archived and is accessible at this link. Click here to access a PDF copy of the presentation slides.
Take-aways from the second webinar include:
• With the exception of the FDA’s policy on “natural” claims, it has been silent on “green claims.”
• “Natural” could be hottest claim on the market but is becoming controversial. Food companies should continually monitor the marketplace to see which claims are drawing challenges.
• Food companies should pay attention to consumers union findings regarding eco-label credibility.
• While third-party certification may not help every food business, certification is a tool that supports your brand and your marketing/sales strategy.
• Retail leaders in sustainability, such as Burgerville, aspire for continuity of sustainability in each link in its supply chain.
• To understand the FTC green guidelines companies need to appreciate three key points: substantiation, specificity and qualification.
• To avoid “green washing” issues, food companies need to understand the complex matrix of federal, state, local and foreign statutes, regulations and guidelines governing “green” advertising.
I hope you can join me, Steve Marinkovich from Propel Insurance, my colleague at Stoel Rives, Anne Glazer, and Peter Truitt from Truitt Bros., Inc. on November 17, at 9 am PST, noon EST, (live Twitter feed at #sustainlaw) for the last webinar in the series as we discuss the following:
• Preventing and Dealing with Consumer Fraud, Unfair Trade and False Advertising Claims from Consumers and Competitors
• Real-Life Businesses Approaches to Sustainability, Product Labeling and Marketing
• Coping with Increased Risks of Food-Borne Illness from Local or Small Farm Products
• Insurance Coverage You Need, Think You May Have but Don’t Have or Think You May Want but Shouldn’t GetContinue Reading...
Co-Authored By Guest Blogger Scott Hansen
According to its website, last Sunday’s New York Times article on E. coli and beef is among the most widely read pieces published by the newspaper this week. The article tells the story of a 22-year-old Minnesota dance instructor who was left paralyzed after being infected with a strain of E. coli in an “Angus Beef Pattie” she ate in fall of 2007. The article traces the story of her burger, points out the many limitations in the current system, and calls eating beef a “gamble.”
While the article is clearly targeted at meat producers and processors, food retailers selling beef products, such as grocery stores and restaurants, are also at risk. This piece is a reminder of the need for retailers to take steps to ensure proper systems and procedures for tracing food to its source (according to yesterday's statement by Secretary Vilsack, retail traceability of ground beef is soon to be a USDA requirement). The Times lauds Costco, which it says is one of the few big producers that tests trimmings for E. coli before grinding.
Retailers should also be mindful of the utility of supplier agreements sufficiently tailored to limit liability or to procure insurance coverage. The greater protections afforded by well-drafted supplier agreements and carefully placed insurance are the best way to mitigate exposure.
Some may choose strong indemnification provisions and additional insured provisions. Another route, not yet the prevailing trend in the industry but perhaps in the near future, involves wrap-up insurance covering the entire supply chain, accompanied by covenants of cooperation between members of the supply chain.
Wrap-up insurance/covenants of cooperation approach has the advantage of potentially avoiding expensive and reputation-damaging litigation between members of the supply chain. Wrap-up insurance is also more likely to result in sufficient coverage to protect the retailer or restaurant chain.
No matter the path chosen, thoughtful placement of insurance coverage and confidence in supply chain contracts can help a food company weather the storm of a food-borne illness outbreak.
For food companies (and other businesses), a dangerous and deadly flu pandemic (e.g., H1N1) can be a business disaster. Adding insult to injury is personal injury litigation and the accompanying insurance coverage nightmares that follow.
What Are the Personal Injury Litigation Risks?
For restaurants, airlines, cruiselines, supermarkets, hospitals, schools, and other institutions, risk comes from exposure if customers can link their illness with employee or staff illnesses. While proof of causation will be a hurdle for these plaintiffs, employers without clear and enforced pandemic policies (e.g., policies aimed at limited transmission and keeping sick workers home) are at risk. Large-scale deaths of healthy children and adults will raise the stakes enough to garner attention from plaintiffs’ lawyers and motivate lawsuits (whether merited or not).
While workers’ compensation statutes generally shield employers from suits by their employees (both alive and deceased), the same bar may not apply to contract employees or customers. Both may have the right to sue if they can link exposure to illness.
Will Personal Injury Claims Be Covered by CGL Coverage?
Generally, third-party claims for bodily injury against a company should be covered by Commercial General Liability (CGL) coverage. Yet coverages, exclusions, and endorsements should be read carefully. With greater frequency, insurers are including relevant (and harsh) language excluding claims related to infectious disease. For example, many policies, especially those issued to food companies, include exclusions for “organic pathogens,” which could be construed by insurers to include flu viruses.
Insureds should also evaluate whether limits and excess coverages are sufficient. Increasing limits of liability are relatively inexpensive and should be considered. It’s not difficult to imagine claims exceeding $100 million if multiple deaths of healthy individuals are involved.
Will Lost Business and/or Lost Profits Be Covered by Business Interruption Coverage?
Depending on the facts, it may be possible for a swine flu pandemic to give rise to business interruption coverage. Such coverage typically is purchased by businesses as part of their property insurance policies, in the form of a rider or endorsement or an optional additional coverage. Business interruption coverage is designed to protect businesses from losses that they may suffer unexpectedly due to unavoidable interruptions in their daily operations.
Business interruption coverage may apply in a variety of circumstances, such as a forced shut-down, or a substantial impairment in access to, a business’ physical plant or warehouses. Recent, infamous examples of events giving rise to such business interruptions are the events of September 11, 2001, and Hurricane Katrina in Florida.
In most property policies, business interruption coverage is only triggered when the site suffers property damage. Physical damage, however, can include contamination of equipment. Moreover, some policies, particularly those written for policyholders in the hospitality industry, do provide coverage for losses stemming from infectious disease without requiring physical damage to premises. Further, civil authority coverage, which is triggered when authorities shut off access to an area in which a business is located, can be triggered without physical damage to the policyholder’s premises.
On the brink of a season during which some predict a possible dangerous pandemic, now is an opportune time for any company to gather its insurance coverage team (lawyers, risk managers, and brokers) to review and mitigate exposures.
When a food-borne illness outbreak happens, few food companies (especially those whose brand is at stake) want an unfamiliar defense lawyer who has little knowledge about food-borne illness responding to claims asserted against them. Unless a food company maintains a high, self-insured retention or has the lawyer of its choosing preselected, its insurer might appoint on the food company’s behalf low-cost defense counsel ill-equipped to respond to the claims and protect the brand.
Commercial General Liability insurance and Products liability insurance commonly maintained by food companies to protect them from the risks of food-borne illness outbreak usually will not cover the damage an outbreak can have on a company’s brand, stock value or sales. Lawyers appointed by insurers may have little understanding of the insured’s business or the impact the outbreak can have on its brand. Unlike in other areas, such as securities litigation, insurers are not as likely to have a panel or preapproved list of experienced food liability lawyers ready to deploy.
What a food company should consider before a food-borne illness outbreak happens:
1. Identify lawyers who are:
A. Familiar with (or will pledge on their dime to learn) the food company's business and brands;
B. Experienced in responding to consumer claims and food-borne illness; and
C. Knowledgeable about potential expert witnesses (about both those that the company will hire and those that plaintiffs will hire).
For companies with active crisis management plans , these lawyers likely have already been identified and included on the crisis management team.
2. Work with your broker, insurance coverage lawyer and preselected defense lawyer(s) to get preapproval of your chosen lawyers and agreement on their fees
For the sake of the business relationship (and self-interest), many insurers may agree to preapproval. Consider seeking preapproval at the time of renewal when a commercial insured may have the most leverage with an insurer.
For those with preapproved defense counsel, please consider sharing your experiences and insights. Comment or email.
University of Nebraska has posted video on its website from the entire three days of the 2009 Governor’s Conference on Ensuring Food Safety. You can view my presentation on Defending Liability in Foodborne Illness Outbreaks. More important, you view the presentations of Dr. Andrew Benson and the other scientists who offer fascinating insights into the latest developments driving the science of food safety.
For lawyers and insurance adjustors, compartmentalizing food-borne illness claims is easy. They often see their jobs solely as minimizing the tort liability and legal fees. In my experience, attorneys and adjustors often fail to appreciate how outbreaks can affect a client’s (or even a whole industry’s) business going forward. Often, the long-term business losses of a food-borne illness outbreak, recall, or government alert are not insured.
There is no better example of how a nationally reported food-borne illness outbreak can affect an entire industry (or even an entire category of food products) than the 2006 E. coli spinach outbreak. Two new studies published by the Agriculture & Applied Economics Association (AAEA) in its Choices magazine analyze consumer information and studies in the wake of the spinach outbreak.
Among the highlights from the first study, “Public Response to Large-Scale Produce Contamination” by Carra Cuite and William K. Hallman, were findings that Americans were more aware of advisories beginning than ending. For example, 87% of spinach consumers knew about the outbreak, but more than six weeks after the FDA had lifted its spinach warnings “almost half (45%) of people who were aware of the spinach recall were not confident that the recall had ended.”
A second study entitled “E. coli Outbreaks Affect Demand for Salad Vegetables” was authored by Faysal Fahs, Ron C. Mittelhammer, and Jill J. McCluskey. It examines the cumulative effects that sequential outbreaks can have on consumer demand and concludes that “the empirical results suggest that the subsequent outbreaks had a greater impact on the consumption of salad vegetables than the first.”
For food companies the lesson is this:
A lawyer’s role in responding to a food product crisis is important. But the roles of others, such as public relations experts, may be as important or more important in preserving the business. Make sure your lawyer (and your insurer) understands that the world may not revolve around simply resolving the tort claims as economically as possible.
Food business clients frequently want to ensure that they have sufficient liability limits in the event of an outbreak (they also want to make sure they have adequate coverage, but this is a separate discussion). Determining the amount of a business’s limits depends on the business’s possible exposures. No one-size-fits-all formula is available. Every business should have a yearly conversation with its counsel and broker to determine what makes sense.
Disclaimers aside, a few pieces of recent news should help inform the discussion of liability limits:
First, we've learned more about the food-borne illness claims filed in the peanut outbreak earlier this year. Here’s a complete list of the claims (personal injury, commercial, etc.) asserted in the PCA bankruptcy and a newspaper article about them. Most of the claims appear to be filed by Marler Clark, though other food-borne illness claims also appear. So far, I count about 100 claims filed in the PCA bankruptcy (out of a CDC-reported 714 illnesses). Of those claims, at least eight resulted in deaths. The death claims are valued by the plaintiffs' at $10 million each. The nondeath claims are valued at up to $1 million each. Total personal injury claims are approximately $150 million. Plaintiffs have probably overstated their claims, but given the national outrage against PCA, a jury might lend credibility to the bloated values and award larger sums.
The other recent news is that CDC has released some interesting statistics about food-borne illnesses. For 2006, leafy vegetables and fruits/nuts accounted for the largest number of reported cases of food-borne illness (33%). Produce and nut products that might not have been associated in the past with food-borne illness (and, therefore, liability exposure) are now frequently associated with outbreaks. As exemplified by the PCA situation, claims from a national or even a regional outbreak from produce or nuts can easily exceed $100 million.
Food Safety Magazine ran an interesting piece by Aaron Krauss titled “Reducing the Risk of Failure.” The article was part of the magazine’s focus on limiting liability for food companies. Mr. Krauss includes a good discussion of the pros and cons of indemnities and disclaimers of warranty and liability as ways to shift or reduce liability for claims within the supply chain. Yet, the article does not discuss how to shift liability for claims from outside the supply chain, i.e., consumer claims.
For example, Mr. Krauss advocates that if members of the supply chain limited liability between themselves to the purchase price of the product, this might reduce or eliminate litigation. Mr. Krauss points out that “if everyone in the ‘peanut butter food chain’ had limited their liability, a store might not bother suing, since it could only recover its purchase price.”
Limitation of liability clauses, while effective to reduce exposure between members of the supply chain, will have no limiting effect on consumer claims. Unless a food seller can invoke a “passive retailer” defense, each member of the supply chain will be strictly liable for injuries to consumers caused by the food product.
The only ways for a food seller to shift consumer liability is through either supplier indemnity or insurance. Mr. Krauss is correct that indemnities by suppliers may be hard to secure and harder to enforce. And, claims defended by the seller’s own carrier will invariably result in higher premiums.
Because insureds will generally be penalized through premiums for invoking their own insurance, the best insurance is somebody else’s insurance. Even a food seller that might not have the leverage with its supplier to receive indemnification may be able to secure “additional insurance.” Naming a vendor as an additional insured frequently costs the supplier nothing in added premiums. If seller specifies that this insurance is to be “primary and noncontributory,” the supplier’s insurance may be the first line of defense for claims involving the supplier’s products.
If a supplier will provide additional insurance, follow-through is essential. The seller needs to (1) verify that the supplier has, in fact, named the seller as an additional insured and (2) review the operative language of the additional insured endorsement and/or policy language to ensure that it does not include unacceptable conditions or exclusions.
Mediation has become a critical process for resolving large, multi-party consumer claims. Settlement of these claims is often complicated by insurance and third-party recovery. Often a brokered process is the only practical way to get to a meeting of the minds. Yet, in my experience mediations that can succeed fail because of the lawyers and mediators. Having been through a number of multiparty mediations (sometimes with more than 20 separately represented interests) and having been trained as a mediator, here are my top five tips entering into a multiparty mediation:
1. Bargain from Strength—Be Prepared to Try the Case. Go into the mediation with well-developed trial themes, a trial plan, an opening statement, prepared expert witnesses, and, if possible, jury research. Whether the mediation occurs early on in the case or on the eve of trial, your opponents will know whether you are prepared to try the case. If you are not prepared, settlement will be harder and your client will be asked to compromise more. While trial preparation is critical in any case, it is most critical where the liability and damages claims against your client are the strongest and your client is in a difficult position (i.e., those cases your client would least like to try). For these cases, any leverage your client can bring to the table is important. Creating the perception that your client is ready to go to trial will create leverage.
2. Make Sure the Right Players Are Present and Educated. Mediation cannot succeed unless each party includes a client/insurer representative with full settlement authority (or easy access to full settlement authority). For large multiparty claims, having those representatives physically present is critical. Perhaps more important is that those with authority be prepared in advance of mediation to exercise authority. It should go without mention that a lawyer should prepare his or her own client for mediation by providing a complete and honest assessment of the settlement value.
As or more important may be educating the opposing party, though this is easier said than done. Communicating your adversary’s weaknesses to your adversary is tricky. In most situations, a lawyer’s assessment of the opponent’s weaknesses is not considered credible and is written off as “chest-beating.” The only way a lawyer can succeed in communicating with an opponent about the opponent’s weaknesses is if the lawyer has worked in advance at building a relationship and credibility with the adversary.
3. Select the Right Mediator. For difficult multiparty cases, mediator selection is an important, though often overlooked, key to success. Look for a mediator who will work hard in advance of the mediation to understand the barriers to settlement (see number 4 below). Look also for a mediator who (1) has the ability to quickly grasp complex issues impeding settlement; (2) is not afraid to confront parties with difficult questions; and (3) understands the mediation process, possesses good people skills, and is creative. Avoid at all costs a mediator whose primary tool is to brow-beat, make rulings, or intimidate the parties (this never works unless the mediator also happens to be your trial judge).
4. Educate the Mediator (Well in Advance of the Mediation if Possible). If a mediator has waited until the morning of mediation to first meet with the parties, it may be too late. If there are more than a few interests represented, the entire mediation session may be consumed in educating the mediator about the relevant issues. Worse, the mediator may feel a need to take “short-cuts” and end up alienating the parties before negotiations have really begun. At minimum, the mediator should spend time well in advance of the mediation date, preferably in person, talking with counsel from each side. In advance of mediation, parties should also consider setting up a session for the mediator to hear directly from key expert witnesses. On the morning of the mediation, the mediator should have learned enough to understand the major settlement impediments and should come with a plan of action.
5. Diffuse Personality Conflicts and Emotions. If your client’s goal is to settle the case if at all possible, a trial lawyer must do what he or she can to set aside the skirmishes, grudges, or ill will that might have built up during discovery, motion practice, pretrial preparation, etc. While I’m a big proponent of setting aside ego and of building relationships in litigation, this may not always be possible. But mediation/settlement negotiations are the one time in the litigation process where consensus building is the objective. Lawyers should do what they can (swallow pride, move on, etc.) to extricate personality conflicts from the mediation.
Similarly, lawyers should assess during the mediation the degree to which personality conflicts and emotions among the parties are inhibiting consensus. When practical, lawyers should consider counseling their clients on setting aside ego and emotions. If a heart-felt apology or another message can bridge the difference between the parties, the client should be told and given the opportunity to make the apology or to communicate.
Law 360 has an article up this week titled “Coverage May Be Tricky For Food Recalls.” I am among the lawyers quoted in the article. For me, the takeaway is that any food company should have in place a strong team of insurance coverage counsel and brokers. Food companies need to ensure that they have in place the coverage they intend to have in place.
The article also suggests that the markets for recall insurance may be evolving and becoming more accessible. Recalls can be financially devastating. To the extent that recall insurance is affordable and provides relevant coverage, it should be considered.
Bill Marler posted on his blog recently a complaint for declaratory relief filed by an insurer for Peanut Corporation of America (“PCA”). Mr. Marler comments, “Frankly, I read this suit several times and still do not see what the fight is about.” For those who represent commercial insureds in pursuing coverage from their insurers, the suit is no surprise. The suit is likely a function of the fairly limited insurance limits available to PCA, PCA’s tender of both bodily injury and recall expense related claims, possible exclusion for organic pathogens and/or allegations of intentional acts by PCA.
The complaint filed by PCA’s carrier, Hartford Casualty Insurance Company, alleges that PCA had at the time of the outbreak a $1 million primary liability insurance policy and $10 million umbrella insurance policy. Given the high number of probable personal injury claims (some of which will involve wrongful death) and the broad scope of products affected by the recall, claims will far exceed limits available to PCA under the Hartford policies. This outbreak demonstrates why any food manufacturer or seller should carefully consider whether its insurance limits are sufficient. A $10 million policy might have seemed to PCA like a great deal of coverage prior to the outbreak; today, the prevailing perception is that it is totally inadequate.
The complaint also alleges that the Hartford policies included “terms, conditions, exclusions, and limitations including but not limited to those pertaining to . . . coverage for claims arising out of the presence, suspected presence, or exposure to, among other things, bacteria.” The policies are not attached to the complaint. However, the allegation suggests that the Hartford policy might have included an organic pathogens exclusion. If the policy includes such an exclusion, PCA may be without coverage for any claims related to the Salmonella outbreak. The organic pathogens exclusion may exclude any claim for bacterial contamination of food products. As we’ve discussed previously on this blog, every food manufacturer should review its coverage to ensure that its policy does not include an organic pathogens exclusion.
Finally, the quick filing of a declaratory relief complaint by Hartford illustrates why a food seller needs to engage an experienced insurance coverage counsel immediately. Coverage counsel can assist in developing a strategy to pursue and preserve available insurance. Also, in situations such as PCA’s, all communications with insurers should be managed by coverage counsel. From the outset, communications with insurers are critical because they are likely to become relevant to the inevitable coverage disputes with the carriers.
Happy New Year. Thank you for your support, readership and feedback for this site. Since we launched the blog in late February of 2008, the growth in readership has been extraordinary. I'm overwhelmed at the response. My hope is that the blog has provided some measure of assistance to those in the food industry. As always, I welcome your feedback, suggestions and critiques.
In the coming year, I hope to spend more time on the blog exploring trends in liability, insurance coverage and consumer claims related to the food industry. I also hope to discuss more deeply the anatomy of consumer-based food borne illness and labeling litigation.
You may notice a drop-off in the frequency of postings between February and April as I will be spending more time on the road. I apologize in advance. One of the things I will be doing (and posting about) is visiting with students and faculty at the Cornell Food Science program in Ithaca, New York. I hope to learn more about emerging technologies related to food production and safety.
I just returned from ACI’s Second National Forum on Food-Borne Illness, which included several interesting presentations and discussions. One was by Dan Engeljohn, Deputy Assistant Administrator of the Office of Policy and Program Development at the Food Safety and Inspection Service (“FSIS”). Mr. Engeljohn spoke about FSIS’s priorities for “2009 and beyond.” Takeaways from this presentation include:
FSIS is increasingly concerned with strains of E. coli other than O157:H7. Non-O157:H7 strains such as E.coli O121:H19 and O111 are growing more prevalent in the environment. FSIS is putting additional resources into developing methodology for detection of non-O157 STECs.
As FSIS, CDC, FDA and local health departments develop this methodology, the industry can expect more reported outbreaks and more liability exposure. Most experts believe that many non- O157:H7 outbreaks go undetected. Increased focus on detection of non-O157 E. coli strains is yet another reason to examine the sufficiency of your companies' insurance limits.
Frozen, Not Ready to Eat Meals
According to Mr. Engeljohn, because of recent salmonella scares, FSIS remains concerned about “frozen, not ready to eat” meals and specifically “frozen, not ready to eat” poultry meals. He explained that “evidence is mounting that these products cannot be safely prepared unless salmonella is controlled in the source materials.” In other words, FSIS now believes that no amount of package labeling or consumer education can prevent consumers from undercooking these meals.
FSIS jurisdiction over salmonella in poultry is limited. FSIS attempts restrict the sale of “frozen, not ready to eat” meals or impose more stringent standards against salmonella in poultry may be a reach for the agency. As discussed in Supreme Beef Processors v. USDA Salmonella, "is not an adulterant per se, meaning its presence does not require the USDA to refuse to stamp such meat 'inspected and passed.'" Absent statutory reform, FSIS action in this area may be challenged.
Mr. Engeljohn stated that FSIS is “deeply concerned” about listeria. It believes that gains made in recent years at meatpacking plants may be undone by problems at supermarket deli counters. FSIS believes that little is being done to address critical control points at the retail level, such as proper cleaning and sanitizing of meat slicers. FSIS may be exploring ways to exercise more jurisdiction to regulate supermarket delis.
Last month, a state judge in Minnesota awarded summary judgment to a lettuce supplier of restaurants associated with an E. coli outbreak in 2006. The restaurant supplier brought suit against its suppliers. The suit appears to have been based at least in part on an indemnification agreement between Vistar (which delivered lettuce to restaurants) and Bix (which supplied lettuce to Vistar). According to the court, the agreement required Bix to “indemnify and hold harmless the Buyer and its customers from any claim, demand, loss, damage, liability, cost and expense, directly or indirectly, arising out of, or in connection with, or resulting from, the willful or negligent acts or omissions of the seller . . . sold by the Seller . . . to the buyer.”
Vistar, according to the court, “delivered sealed packages” of lettuce to the restaurants and did not process the product. Bix “both processed the lettuce (chopped it up) and packaged the lettuce.”
The court granted summary judgment to Vistar for two reasons:
(1) Vistar was the “classic passive seller in the chain of distribution” and therefore was not a manufacturer under Minnesota law; and
(2) The language of the indemnity “is clear, inclusive, and unequivocal,” and “Vistar’s tender of the claims against it to Bix should be honored.”
As to the latter reason, the court found relevant that “Bix has $2,000,000 in direct coverage and $10,000,000 in excess coverage insurance that would cover the claims made against it.”
A couple of observations:
1. Importance of Being Named an Additional Insured – Surprisingly, it does not appear from the judge’s decision that Bix was required to name Vistar as an additional insured. Had Bix’s carrier named Vistar as an additional insured, Vistar could have recovered against Bix’s insurer directly. Requiring a supplier to provide insurance (and verifying that the supplier has named you as an additional insured without unacceptable conditions) is a relatively easy, yet important step to protect your business.
2. Liberal Reading of Indemnity Clause – The court says that the indemnity obligation, which requires “willful or negligent acts or omissions,” is “clear, inclusive and unequivocal.” Yet the court found no “willful or negligent act or omissions” on the part of Bix. In fact, commenting on Bix’s own motion for summary judgment requesting that the court rule it too is not liable as a matter of law, the court said that Bix’s “argument is not without merit.” Not all courts may interpret this indemnification clause so favorably in the absence of a supplier’s negligence. This is yet another reason to ensure that your supplier has provided adequate insurance.
Insurers are making efforts to exclude food-borne illness claims from coverage under comprehensive general liability (“CGL”) policies. The "Organic Pathogens Exclusion" is a good example.
While a claim for food-borne illness may normally be covered by a CGL policy, if you have an organic pathogens exclusion, your insurer will not provide a defense and will not cover your losses if your business is sued as a result of a food-borne illness.
Organic pathogens exclusions can take multiple forms. Some policies include an endorsement that excludes any “loss” for “any actual, alleged or threatened exposure to, existence of, presence of, ingestion of, inhalation of or contact with any biological agents.” “Biological agents” are usually defined to include things like bacteria, viruses or other pathogens (whether or not a microorganism).
Other policies simply include an endorsement providing that “this policy does not insure any loss, damage, claim, cost, expense, fine, penalty or other sum either directly or indirectly arising out of, relating to or caused by an “organic pathogen.” These policies generally define “organic pathogen” to mean “any organic irritant or contaminant, including but not limited to fungus, bacteria, virus, or other microorganism of any type, including but not limited to their byproducts such as spores or mycotoxin, or any hazardous substance as classified by the EPA.”
Any business involved in food production should take notice. Insurers are actively marketing policies with organic pathogen exclusions to food businesses whose greatest liability exposure may be food-borne illness. Careful and regular review of insurance policies and coverages is essential.
I wrote recently about legislation introduced in Congress to compensate tomato growers for their losses during the recent and protracted Salmonella Saintpaul investigation. While the legislation has not yet advanced, Cindy Skrzycki from Bloomberg.com is also covering this issue and wrote a great article "Tomato Growers Seek Payback on Samonella Scare."
According to the Bloomberg article, even Bill Marler, the leading plaintiffs' attorney in the area has sympathy for the growers and believes that compensation may be warranted (though he believes its premature).
The Bloomberg article explains well how tomato growers (many of whom are small businesses) have no where else to turn:
"The U.S. Department of Agriculture runs crop-insurance programs that cover disasters from floods and hurricanes, not crops ensnared in recalls. Some companies have recall insurance, but they're not likely to collect unless there is a recall -- not a warning or an advisory."
I recently received a call from a reporter about legislation introduced by Representative Tim Mahoney (D-Fl), that would provide “emergency assistance to growers and first handlers of tomatoes.” The text of the bill, HR 6581, as referred to the House Agriculture Committee reads as follows:
SECTION 1. EMERGENCY ASSISTANCE FOR GROWERS AND FIRST HANDLERS OF TOMATOES.
(a) Emergency Assistance - There is hereby appropriated to the Secretary of Agriculture $100,000,000, to be available until expended, to make payments to growers and first handlers, as defined by the Secretary, of fresh tomatoes that experienced crop or market losses, or both, as a result of the Food and Drug Administration Public Health Advisory issued on June 7, 2008.
(b) Payment Amount - The amount of the payment made to a grower or first handler under this section shall not exceed 75 percent of the greater of--
(1) the value of the unmarketed tomatoes; and
(2) the actual loss incurred by the grower or handler.
The reporter asked whether those intended to receive financial assistance under the bill would be compensated some other way, such as insurance payments. She also questioned the fairness of this legislation.
The answer to the first question—will producers receive insurance payments—is most likely no. Some producers and sellers maintain recall insurance (or perhaps some form of business interruption insurance). As discussed previously in this blog, recall insurance may not cover events that are not “recalls.” In this case, FDA never requested a recall. Even for forms of recall insurance that may offer coverage for events other than a recall, insurers may argue against coverage because it turns out that there is no evidence that tomatoes were the culprit of the Salmonella Saintpaul outbreak. The bottom line is that few, if any, producers or sellers may receive insurance payments for their business losses (estimated to be in the hundreds of millions of dollars).
Although many “fault” FDA, tomatoes have been linked to previous outbreaks. FDA’s warning about tomatoes was the food equivalent of rounding-up the usual suspects.
Yet, government relief may still be justified and, therefore "fair." Events leading to the losses suffered by producers and sellers (many of whom are small businesses) were fortuitous and beyond their control. While relief may not be justified because of some "fault" by the federal government, government relief may be justified as “disaster relief.” If relief is justified for agriculture wiped out by floods or other acts of God, why is not fair for those same farmers and producers to be compensated for this kind of disaster?
A fundamental difference between tomatoes and spinach is shelf life. Tomatoes can last in cold storage for many weeks. Leafy greens like spinach must be sold within about a week of harvest. Therefore tomatoes that can’t be sold now may be able to be sold after the FDA pinpoints the contamination source. Growers and suppliers may avoid at least some immediate economic impact.
Still, given the scope of the FDA warning, many will suffer economic loss. No doubt litigation between those in the supply chain will ensue.
From a legal perspective, what may be more interesting is the insurance fallout. Although the FDA has not issued a “recall,” claims will be made by suppliers, growers and retailers holding so-called “recall insurance.” Policy language varies.
Some policies may require an actual “recall” and preapproval from the insurer before a claim can be made. These policies may make recovery especially difficult for a policyholder. Other policies may include broader terms, for example covering a situation where product “withdrawal is made necessary by reason of determination by the insured or by any ruling of any governmental body that the use of such product or property could result in bodily injury or property damage, because of any known or suspected defect, deficiency, inadequacy or dangerous condition in it.”
Even for those holding broader recall insurance, expect insurers to push back. Insurers will argue that the FDA never made a “ruling” that, for example, tomatoes from New Mexico “could result in bodily injury or property damage.” Yet the FDA has warned consumers and retailers for nearly two weeks that these tomatoes have not been ruled out as a possible source of the outbreak. Enough may be at stake for the insurers to resist these claims and argue the narrow scope of recall insurance.
Businesses contemplating a claim under their recall insurance should be as strategic as possible. Tenders should be made promptly but carefully. Information documenting the claim should be collected thoroughly and systematically.