Preparation for Melamine Issues- Updating Crisis Management Plans and Insurance Coverage
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While largely under the radar in the American press due to the compelling election cycle and historical meltdown in the financial markets, the news out of China concerning melamine has gone from bad to worse. Concern about Chinese dairies has morphed into a global crisis affecting what seems like an infinite number of products tainted with melamine.
Melamine has been intentionally introduced into animal feed, dairy products, pet food and other products because it can make diluted or poor-quality products appear to be higher in protein by elevating the total nitrogen content detected by some simple protein tests. Already, the FDA has identified a wide variety of products affected in the first wave of concerns about Chinese dairy products.
How should a food manufacturer or retailer prepare for a melamine issue? Any food company that imports any food ingredient or product from Asian markets should be concerned, and its first steps should be to update its crisis management plan and rehearse a melamine recall.
Food companies should also review with coverage counsel and their brokers whether they have—or can obtain—insurance coverage for financial exposure from melamine tainted products. Financially, a food company will be affected by a melamine issue in at least three ways: recall costs, loss of business and personal injury/consumer fraud claims. Standard comprehensive general liability (“CGL”) insurance may not cover any of these exposures. Most CGL policies do not cover recall costs. While recall and property insurance policies are available, the coverages offered by these policies also may be problematic.
Even personal injury or consumer fraud claims might be denied by CGL insurers. For example, many CGL policies will only provide coverage for occurances that arise out of events that are “accidental.” “Accident” is commonly defined as “a sudden, unforeseen or unintended event.” Even though a food company may have no knowledge of an upstream supplier’s fraudulent acts, some insurers are sure to argue that claims arising from products intentionally tainted by melamine are not covered.
The insurer's argument denying coverage is not a slam dunk and may not prevail. But, the key is to avoid (or minimize) the dispute with the insurer. To the extent possible, when placing insurance, a food company should obtain a representation or endorsement from its insurer that coverage will be extended to claims arising from melamine-tainted food.
Tomato Fallout - Recall Insurance Coverage Disputes
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.
