More on Reducing the Risk of Failure - Focus on Shifting Liability For Consumer Claims
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.
Another Reminder Why Indemnification and Insurance Requirements Are Important
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.
