What to Ask About Recall or Product Contamination Insurance Coverage
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?
Litigation and Insurance Coverage Risks from Swine Flu (H1N1)
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?
Possibly. The lawyers at Anderson, Kill and Olick have written a nice piece on this and other swine flu coverage issues. Here’s their summary of business interruption coverage for swine flu:
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.
Tort Damages Not the Only Exposure from Food-Borne Illness Outbreaks
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.
Liability Limits: How Much Should Your Food Company Maintain?
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.
A Reminder To Review Insurance
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.
PCA Recall - Insurance Lessons for Food Sellers
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.
Five New Year's Resolutions
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Unfortunately, 2009 does not promise to be any easier than 2008 in protecting your business against food liability claims. Many argue that threats will only increase in the new year. Here are five things you can do to reduce exposure in the coming year:
1. Review Insurance Coverage and Limits Carefully – Both the variety and size of claims are escalating fast. For example, just a couple of years ago consumer claims from non-O157 E. coli, melamine, diacetyl or organic labeling seemed far-fetched, but all are now a grave reality. Federal, state and local governments will continue improving detection techniques since the rash of large, national food-borne illness outbreaks in 2006-08. The Obama administration will likely make increased funding in this area a priority. The odds that your company will be targeted in a nationwide outbreak resulting in claims in the hundreds of millions of dollars are increasing. Because of the exposure, insurance companies now more than ever will be looking for ways to reduce their coverage.
2. Review and Revise Supply Chain Agreements – Aside from insurance, one of the most effective ways to reduce, spread and mitigate risk is to ensure that those in your supply chain provide adequate insurance and indemnity for problems related to their products. But just because your supply agreement happens to mention insurance and indemnity does not necessarily mean those clauses will help when you need them. The only way to ensure that they will be honored and enforced is to ensure that your legal team (experienced in litigating these clauses) drafts these carefully.
3. Reassess Suppliers – Your choice of suppliers may be key to avoiding or reducing risk. Even if you demand sufficient insurance and indemnity from a supplier, a supplier of sufficient size may not be able to access insurance or have assets available to satisfy indemnity obligations. As important as your food safety, HAACP and other programs may be, they are really only as strong as your suppliers’ programs. Careful audit and assessment of your suppliers’ food safety programs is important.
4. Increase Scrutiny Against Fraudulent Imports – Melamine, tainted rice and now “laundered honey” are all good examples of how fraud in the global food chain can dramatically affect unsuspecting U.S. food sellers. [add more advice here?]
5. Review, Update and Rehearse Crisis Management Plans – How your company is prepared to respond to a crisis is a good predictor of how your company will weather the crisis. With the stakes increasing, you need to be prepared to face the worst. Continual review, updating and rehearsal of your crisis management plan is key. Everybody on the crisis management team needs to understand his or her role and be ready for different scenarios.
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.
"Organic Pathogens Exclusion"
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.
