Food Companies Should Revisit Insurance Program and Other Risk Management in Light of Emerging Massive European Union E. coli Outbreak
The E. coli outbreak unraveling now in the European Union, centered primarily in Germany, is setting new records for both the number of affected persons and the number of persons diagnosed with Hemolytic Uremic Syndrome (HUS), a serious complication from E. coli infection (HUS can lead to kidney failure, brain damage and death). As of the writing of this blog, the latest news can be read here and here. To date, 17 people are believed to have died, 470 people have been diagnosed with HUS, and 1,534 people have been infected with E. coli.
The strain of E. coli is reported to be E. coli O104:H4, a previously rare strain of shiga toxin producing E. coli. The source is still a mystery, but many believe it to be associated with fresh produce.
How is this relevant for U.S. food businesses? At the very least, the European Union outbreak changes the equation for liability exposure. Previously, most food safety experts would opine that about 10% of those infected with a shiga toxin producing E. coli would be expected to develop HUS. In the European Union outbreak, the percentage of HUS cases now exceeds 30%. In even a small outbreak, a 30% HUS rate could increase exposure threefold.
Now is the time to:
- Convene your coverage team (brokers, risk management and legal) to reevaluate and audit coverage,
- Reevaluate your suppliers and food processing procedures,
- Revise and clarify your supply chain/co-packing agreements, and
- Rehearse your recall, RFR and crisis management plans.
Food Safety Tools and Defenses for Cheesemakers
Cheesemakers have endured a string of bad publicity recently over food safety. Cheesemakers, especially raw milk cheesemakers, are in the cross hairs of the FDA, the media, retailers and plaintiffs’ lawyers such as Bill Marler. I was interviewed last week on FDA seizure issues by the Pacific Northwest Cheese Project. Click here for the PowerPoint slides from my presentation to the American Cheese Society's annual meeting last August entitled "Product Liability - Protect Yourself and Protect Your Business."
Donate Food Generously and With Immunity
By Guest Blogger Matti Neustadt Storie
It’s that time of year again – time to be thankful for all that we have and to reflect on those who don’t have as much. Many people consider working at soup kitchens and donating to local food banks as a way to help. But what liability attaches to those who donate food? Can you get rid of that can of smoked oysters that’s been in the back of the pantry for four years? What if the food you donate is bad? Or people get sick after eating it?
The federal government and most states have considered this and do not want fear of litigation to prevent people from donating to food banks. “Good Samaritan” food donation laws that immunize good-faith donors of food from both criminal penalty and civil liability exist at both the state and federal level. The Bill Emerson Good Samaritan Food Donation Act (the “Act”) is the federal law, and most states (such as Washington) model their acts after it. The Act limits the liability of food donors absent gross negligence or willful misconduct. Except in cases where a donor donates food that does not meet state or federal regulations regarding quality or labeling, it is unlikely that a contractual release or waiver would be effective in overriding these limitations because of public policy concerns. Other states (such as Oregon) have similar laws, but with slightly different language.
The Act states that a person is not subject to civil or criminal liability arising from the nature, age, packaging, or condition of “apparently wholesome food” that the person donates in good faith to a nonprofit organization for ultimate distribution to needy individuals (e.g., a food bank). “Apparently wholesome food” is defined as “food that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.” So that four-year-old can of smoked oysters may still be a valid donation!
The Act is drafted very broadly, and the immunity from civil or criminal liability is regardless of who is making the claim – neither the food bank nor the ultimate consumer of the food will be able to sue to donor. Furthermore, the Act indicates that it cannot be construed to create liability due to noncompliance with any aspect of the law. This makes it unlikely that a court will find liability based on mere negligence, for example, if a food product was negligently mislabeled such that it would not technically be “apparently wholesome food.” Absent gross negligence or willful misconduct, no liability will attach.
That said, don’t go digging up your recalled spinach and beef from the past year. Liability may still be imposed when the donor acts in bad faith, with gross negligence, recklessness, or intentionally. And no, that doesn’t mean you can draft a waiver to have the food bank accept the recalled food – in most states a pre-injury release or waiver will not prevent a defendant from being held liable for damages due to gross negligence under public policy arguments. Throw out food that is known to be spoiled, contaminated, or otherwise unfit for human consumption. One would hope this common sense advice is so obvious that it need not be said, but you never know ….
So pack up your excess pantry food – or go out and get some fresh stuff – for your local food bank. Nonperishable foods such as dried beans, peanut butter, canned soups, canned vegetables, and dried pastas are always welcomed. Many food banks will also take perishable foods such as hot dogs, ground beef, butter, eggs, and even (in some states) processed game. If you were lucky enough to bag wild game this season but can’t fit it all in your freezer, contact your local food bank to see if they can accept it. And if you live in southern Illinois or the St. Louis metro area, contact the Food Pantry at St. Mark in Belleville. Tell them Pastor Ron’s daughter blogged about them – Merry Christmas, Dad!
Take-Aways from November 17 Webinar: Sustainable Foods Increase Litigation Risks: Developing Strategies to Minimize Exposure
On November 17, we held our final webinar in a three-part series on bringing sustainable food products to market. Take-aways from the third webinar include:
• Be aware that "natural" is a hot button when advertising and labeling sustainable food products.
• "Sustainable" is not addressed in FTC Green Guides so it is imperative to be specific with your claim and/or use third-party certification.
• Truitt Brothers packaging/labels depict the source of their ingredients.
• Food-borne illness issues affect all food producers. Large producers have made significant investments in prevention in recent years; small producers of sustainable products without capital to improve farming or manufacturing practices are at a competitive disadvantage and possibly more susceptible to legal exposure from food borne illness claims.
• Food sellers should identify a crisis management team, review supplier agreements and understand insurance coverage to mitigate risk.
• Food sellers should understand that product recall coverage is excluded on most Commercial General Liability coverage forms.
Thanks again to our presenters and attendees. The recorded webcast was archived and is accessible here. Click here to access a PDF copy of the presentation slides.
Stay tuned for a possible new webinar series on food traceability. We're tracking the latest regulatory and legislative developments.
Comment On Recent New York Times E. Coli and Beef Article: How Retailers Can Protect Themselves
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.
Sodium Putative Class Action Suits to Become Epidemic?
Following the putative class suit filed last month in New Jersey by the Center for Science in the Public Interest (CSPI) against Denny’s, a similar suit was filed in Illinois (apparently CSPI is not directly involved in this action). The Illinois complaint can be found here.
Like the New Jersey complaint, the Illinois action alleges claims of consumer fraud and breach of implied warranty of merchantability. Previous posts on this site have explained why both consumer fraud and implied warranty of merchantability claims should fail on their face.
The Illinois action adds claims for unjust enrichment, accounting and ”breach of contract implied in fact.” Claims for unjust enrichment and accounting seem intertwined and not all that different from consumer fraud and breach of implied warranty claims.
Breach of contract implied in fact is more creative. Instead of directly attacking Denny's representations (which as discussed in previous posts are not really alleged to be inaccurate), this claim asserts something that looks more like a products liability claim. The claim turns not so much on “fraud” but on whether the meals sold “contained excessive amounts of sodium, such that it was not fit for human consumption.” This cause of action alleges that the “bargained for” contract between class members and Denny’s required Denny’s to provide “a meal fit for human consumption.”
While creative, the breach of contract implied in fact claim may be more problematic than the fraud and implied warranty of merchantability claims. First, as discussed previously, Denny’s discloses on its website (and according to CSPI, at its restaurants) sodium content of menu items. Like the fraud claims, proof that plaintiffs could have reasonably bargained for something different seems problematic.
Second, plaintiffs are asking the court to use its equitable powers and step into the shoes of local, state and federal health departments and regulatory agencies to pass on appropriate sodium levels in restaurant food. As a rule, courts use their equitable powers only in extraordinary circumstances (e.g., a building falls down, assets leave the country, an individual’s life or liberties at stake, etc.). If regulators and legislators have not reached consensus on regulating sodium, odds are that most judges will avoid weighing in on the issue.
Despite their problems (and probable lack of merit), best guess is that the plaintiffs' class action bar will continue copy-catting these suits across the country. Doubtful that Denny's will be the only victim.
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.
Before the Outbreak, Preapprove Defense Counsel with Insurer
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.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - What to Do and What to Avoid (part III of III)
By guest blogger Jerry Chiang
The following list will help you preserve your liability shield and protect yourself from the liabilities of your corporation or limited liability company (“LLC”). This is not intended to be an exhaustive list but rather an illustrative list of activities that will either preserve one’s liability shield or undermine it.
Do’s:
• Properly capitalize the corporation/LLC, or in the alternative, obtain sufficient insurance to cover potential liabilities.
• Keep personal and business entity funds separate by creating a bank account for business entity funds and transactions.
• Hold oneself out as an officer or employee of the corporation/LLC.
• In transacting with third parties, make it clear that they are transacting with a corporation or LLC and not an individual.
• As a corporation, observe all formalities listed in your state’s corporation statute and the corporation’s bylaws. To learn more about Washington corporate formalities, visit the Washington Business Corporation Act.
• As an LLC, observe all formalities listed in your state’s LLC statute and the LLC’s operating agreement. To learn more about Washington LLC formalities, visit the Washington Limited Liability Company Act.
Don’ts:
• Avoid paying excessive dividends or distributions.
• Avoid below-market sale of assets to a shareholder, member or a third party.
• Avoid using business entity assets for personal purposes and vice versa.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - Factors Courts Review for Veil Piercing (part II of III)
By guest blogger Jerry Chiang
When courts decide whether to pierce the corporate veil, their analysis is typically a three-step process: (1) whether the defendant-owner exerts sufficient control over the business entity, (2) whether there has been an abuse of corporate form, and (3) whether there is an injury to a third party.
There is no exact percentage of control or ownership that courts require for liability. This is a threshold question the plaintiffs have to answer satisfactorily before courts will consider the abuse of corporate form question.
Abuse of corporate form can come in many shapes, but the following are some of the common examples. Although some of these descriptions are based on corporations, the concepts apply equally to limited liability companies.
• Undercapitalization – This refers to a defendant-owner’s failure to endow the corporation or limited liability company, typically in the beginning stages, with sufficient, unencumbered capital to meet foreseeable business liabilities.
• Milking - Common practices of milking include paying excessive dividends, selling company assets to shareholders or third parties at reduced prices, paying unreasonable management fees, and diverting corporate funds to personal use.
• Commingling - Commingling typically occurs where the shareholder keeps one bank account for both personal and corporate funds. It is also typical to see a shareholder using the corporation’s assets for the shareholder’s personal purposes and other businesses without proper documentation.
• Misrepresentation/Holding Out – This describes a shareholder who represents to third parties that they are dealing with an individual, rather than a corporation.
• Failure to Observe Corporate Formalities – Examples of failing to observe corporate formalities include failure to (1) appoint the required number of officers, (2) issue stock, (3) file tax returns, (4) hold annual shareholders and board of directors meetings, (5) keep a minute book, (6) act through resolutions and (7) create a corporate bank account. Here is a useful discussion of LLC formalities.
If a defendant-owner has committed one or more of the above, a court is likely to find abuse of corporate form.
Once the first two prongs are met, courts determine whether the corporate form should be disregarded in order to prevent fraud or injury to a third party. In other words, there must be a causal relationship between the abuse of corporate form by the defendant-owner and the injury of the plaintiff seeking to pierce the corporate veil.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - Introduction (part I of III)
By guest blogger Jerry Chiang
In starting any business enterprise, especially in the food industry, incorporating the business as a corporation or limited liability company is as important as having a good product or solid business plan. Incorporation is essential because it shields owners from the liabilities of their business. A lawsuit against the business will not impact the personal assets of the business owners because the law recognizes the corporation or limited liability company as a distinct and separate entity.
Incorporation by itself, however, is not enough. In order for the liability shield to remain in place, or for the law to continue to recognize the corporation or limited liability company as a separate entity, the entity’s owners need to observe certain formalities. If the owners are not careful, the law may treat the entity and the owners as one and the same and disregard the corporate entity. This is commonly referred to as “piercing the corporate veil.”
Over the next few days, this blog will give you an overview of what the courts look at when they decide whether to disregard a business entity and find its owners liable. We’ll also provide a list of dos and don’ts to help you avoid losing your liability shield.
For more in-depth discussion of the latest case developments on piercing the corporate veil, especially as it relates to LLCs, keep up with Doug Batey's blog, LLC Monitor.
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.
ACI Announces 3rd National Forum on Food-Borne Illness Litigation
The American Conference Institute announced this week its latest food litigation conference. Here’s the conference brochure. The conference will take place in Chicago on October 26-27 at the Sutton Place Hotel.
Plaintiffs’ lawyer Bill Marler and defense lawyer Al Maxwell are co-chairing the conference. This year promises a greater variety of presentations by in-house food personnel, government regulators, and others. As in past years, I expect a stimulating exchange of information and vigorous debate about competing views of food liability issues. Feel free to email me or comment if you are attending or want more information.
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.
Improved Surveillance Will Lead to More Food-Borne Illness Claims
We’ve explained previously in this blog why increased surveillance by state and federal agencies will lead to detection of more outbreaks (and, therefore, more legal exposure). Others seem to agree.
Law360 published a nice interview with Jim Neale at McGuire Woods, another lawyer experienced in the food liability arena ( a Law360 subscription is needed to access the full article). Jim is quoted in the article as saying, “when, despite the best efforts of all concerned, outbreaks do occur, improved surveillance allows them to be caught and, most often, quickly tracked to the source.” And, as federal money increases to the state health departments (the front line in detecting most of the nation’s outbreaks), rates of detection will accelerate.
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.
Tips For Successful Multiparty Food Liability Mediation
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.
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.
Next Generation Sequencing for the Food Industry
More and more, it is becoming true that nothing drives detection and prevention of food-borne illness than technology (and, of course, with advancements in detection come potential increases in exposure to legal liability). No technological advancement may be more significant than Next Generation Sequencing ("Next Gen Sequencing").
I've recently had the opportunity to spend time learning about Next Gen Sequencing
with Dr. Andrew Benson, a genetic microbiologist at the University of Nebraska’s Department of Food Science and Technology. Dr. Benson has received large research grants to harness the power of Next Gen sequencing. If you’re interested in the field, take a look at this short video, where Dr. Benson explains the technology, and check out the information on the CAGE (Core for Applied Genomics and Ecology) website.
As described on the CAGE website, this Next Gen technology “allows a single machine to accomplish in 48 hours what used to take an entire room full of machines and an army of
staff a month to achieve.”
Dr. Benson and others at CAGE explain further that:
Having such a powerful diagnostic technique now challenges us to rethink completely how we might go about risk assessment. Instead of looking for a single “indicator organism” in a food sample, we can now look at the entire population of microorganisms in a food sample and ask if the community of organisms present is the expected species that normally occupy that food or if the sample contains numbers of unexpected species, and in particular those species that are unique to fecal or soil environments. Thus, our assessment of “risk” is now based on the entire population, including the most abundant species of fecal and soil communities. Because our assessment is based on the entire composition, multiple species that are unique to feces or soil can be used in the determination, making the assessment much more accurate and robust. Moreover, the assessment is not limited to “risk” as we can also determine if the microbial community in a food sample has shifted toward spoilage (which gives us shelf-life predictions) or is consistent with “good” organoleptic properties of the food. The list of applications goes on and on.
Discoveries using this technology are happening at astonishing speed. PFGE testing, now considered the "gold standard" and generic E.coli testing may soon seem old fashioned and crude.
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.
Is It Really A Food-Borne Illness?
At a recent presentation, Dr. Alan Melnick, a public health officer in both Oregon and Washington, provided a useful list of alternative causes of symptoms to consider when someone claims a food-borne illness. Other causes of symptoms that might be confused for food-borne illness include (but may not be limited to):
- Irritable bowel syndrome (IBS)
- Inflammatory bowel disease
- Malignancies
- Antibiotic use
- Gastro-intestinal surgery or radiation
- Malabsorption syndromes
- Immune deficiency
Another practical piece of advice offered by Dr. Melnick: When assessing a food-borne illness claim, determine whether the incubation period is compatible with the illness. Incubation periods (along with other useful information) were provided by Dr. Melnick (relying upon the CDC) as follows:
|
Pathogen |
Incubation |
Symptoms |
Duration |
Source |
| Bacillus cereus |
1-6 hours (vomiting); 6-24 hours (diarrhea) |
Nausea and vomiting or colic and diarrhea | 24 hours (short form); 24-48 hours (long form) | Soil organism found in raw, dry and processed foods, e.d. rice |
| Campylobacter | 2-10 days; usually 2-5 days | Diarrhea, cramps, fever and vomiting; diarrhea may be bloody | 2-10 days | Raw and undercooked poultry, unpasteurized milk, water |
| Clostridium botulinum (botulism) | 2 hours to 8 days; usually 12-48 hours | Vomiting, diarrhea, blurred vision, double vision, difficulty swallowing, descending muscle weakness | Variable (days to months) | Home-canned food, improperly canned commercial foods |
| Clostridium perfringens | 6-24 hours | Cramps, diarrhea | 24-48 hours | Meats, poultry, gravy; foods kept warm |
| Enterro-hemorrhagic E. coli, including E. coli O157:H7 and other Shiga toxin-producing E. coli (STEC) | 1-10 days; usually 3-4 days | Diarrhea, frequently bloody; abdominal cramps (often severe); little or no fever; 5-10% develop Hemolytic-uremic syndrome (HUS) and average of 7 days after onset, when diarrhea is improving (more common in children, elderly and immune-compromised) | 5-10 days | Ground beef, unpasteurized milk and juice, raw fruits and vegetables, contaminated water, sprouts, person to person |
| Listeria | 9-48 hours for GI symptoms; 2-6 weeks for invasive disease | Fever, muscle aches and nausea or diarrhea; pregnant women may have flu-like illness and stillbirth; elderly, immune-compromised and infants infected from mother can get sepsis and meningitis | Variable | Fresh soft cheeses, unpasteurized or inadequately pasteurized milk, ready-to eat deli meats and hot dogs |
| Salmonella | 6 hours to 10 days; usually 5-48 hours | Nausea, diarrhea, cramps, fever | 4-7 days | Poultry, eggs, meat, unpasteurized milk or juice, raw fruits and vegetables (e.g., sprouts), person to person |
| Shigella | 12 hours to 6 days; usually 2-4 days | Abdominal cramps, fever and diarrhea; stool may contain blood and mucus | 4-7 days | Contaminated food or water, raw foods touched by food workers, raw vegetables, egg salads, person to person |
| Staph (toxin) | 30 minutes to 8 hours; usually 2-4 hours | Nausea, cramps, vomiting, diarrhea | 24-48 hours | Custards, cream fillings, potato or egg salad, sliced meats |
| Vibrio cholerae | 1-5 days | Profuse watery diarrhea and vomiting, severe dehydration | 3-7 days | Contaminated water and shellfish, street vended food |
| Vibrio parahaemolyticus | 4-30 hours | Watery diarrhea, abdominal cramps, nausea, vomiting | 2-5 days | Undercooked or raw seafood (fish and shellfish) |
| Vibrio vulnificus | 1-7 days | Vomiting, diarrhea, abdominal pain; more severe in patients with liver disease or who are immune-compromised; can cause invasive infection (sepsis) | 2-8 days | Raw seafood, particularly oysters, harvested from warm coastal waters |
| Yersinia | 1-10 days; usually 4-6 days | Appendicitis-like symptoms (diarrhea and vomiting, abdominal pain) | 1-3 weeks | Undercooked pork, unpasteurized milk, contaminated water |
Nitty-Gritty on Menu Labeling Regulations and What Can Be Done to Stem Consumer Litigation
As restaurant chains operating in King County, Washington are readying to comply with the new menu labeling law, serious questions arise. Does each menu item have to be sent to an expensive lab for testing? How accurate does the nutritional information need to be? How does a restaurant account for the inevitable variables of made-to-order meal preparation (an extra tablespoon of cooking oil can add 120 calories to a dish)? Does a restaurant that complies with the King County law open itself to consumer labeling claims because its nutritional information cannot be 100 percent accurate?
According to the Seattle Post Intelligencer (“PI”), the question concerning the tools that can be used by a restuarant chain to determine nutritional information may have been resolved in King County. The article reports that restaurant chains in King County have been given authority to “use nutritional software to calculate what was in each menu item rather than the pricey proposition of sending every dish off to a laboratory.”
What is not clear are what protections against consumer protection/tort liability a restaurant may have for “the natural variations that come with cooking restaurant food” or the variability between laboratory analysis and nutritional software. As one restaurateur said, “If you’re working by hand and making pasta, putting in cream and tossing in things as you go, it’s probably fairly close, but there are going to be variances because it’s not prepackaged . . . . Even if you’re cutting a meatloaf, if the specifications [sic] on the meatloaf is 12 ounces and (instead) cuts 13 ounces, it’s going to be off by 6 to 8 percent.”
Legal liability from variables in restaurant cooking is “not a theoretical fear.” As pointed out by the PI, “Applebee’s is facing a $5 million lawsuit over just that issue, after an independent lab found more calories and fat in a menu item than the chain’s nutritional information claimed.” One of the complaints filed against Applebee’s was by a person from the Seattle area.
Serious hurdles exist for any plaintiff’s attorney to prove liability and damages or certify as a class a nutritional labeling case against a restaurant:
1. Menu labeling suits are based on the theory that the nutritional information disclosed was 80, 90 or even 95 percent accurate and not 100 percent accurate. Does a reasonable consumer really believe that nutritional labeling of restaurant menu items has no room for error? Given the inherent and obvious variabilities involved, isn’t 80, 90 or 95 percent accuracy for nutritional information reasonable?
2. Even more significant, how does a plaintiff prove causation? Obesity, heart disease and other medical problems are complex medical problems. Even the medical community does not agree on causes of obesity. Surely, obesity , diabetes, and heart problems can't stem from a single meal or even a series of meals from just one restaurant that was 5 percent off in its estimate of nutritional information.
3. Even if liability can be established, class certification seems dubious. How can issues of liability or damages, which by definition vary with each person, ever be considered “common” or “typical” among a vast group of customers sufficient to justify class certification?
As we have seen over and over again in recent legal history, none of these barriers will deter every lawyer. The potential recovery and the targets (i.e. large restaurant chains) are too big not to try. Already, multiple putative class actions have been filed against Applebee’s.
Practically, several things should happen to protect restaurants doing their best to disclose nutritional information to their customers. First, restaurants should be advised to make sure their customers appreciate the variabilities and room for error in their nutritional information. The better a restaurant can prove that a plaintiff was not reasonable in reliance on 100 percent accuracy, the better its chance of having the plaintiff’s claims dismissed.
Second, there should be a legislative solution. The state legislature should exempt from the state consumer protection statute claims for nutritional labeling that meet an accepted standard. Why should restaurants that make their best efforts to disclose nutritional information to their customers be penalized? Without legislation, tort law and consumer protection statutes have the perverse effect of discouraging restaurants from providing disclosures to their customers.
More on Supply Chain Verification and Crisis Management
Food Safety Magazine’s latest issue focuses on “Industry in Crisis Mode.” The issue includes an article by Shaun Kennedy, director of the National Center for Food Protection and Defense (NCFPD). Mr. Kennedy provides a good overview of the elements of a supply chain verification program that any food seller should consider.
Mr. Kennedy acknowledges that costs for third-party audits, fixing supply chain problems, and establishing traceability can be high. To justify costs, he points to the recent experience of Maple Leaf Foods. According to Mr. Kennedy, Maple Leaf Foods incurred “direct costs to the company of over $20 million. The shareholder costs are even greater with its stock price having dropped by over 20% by the end of August since the announcement of the recall, a shift of over $200 million.” These costs do not include anything to compensate possible tort victims or to respond to inevitable products liability litigation (whether merited or not).
"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.
Yes, We Have No Tomatoes
By Guest Blogger Richard Goldfarb
Sunday, at a local restaurant, I saw a sign saying that there would be no fresh sliced tomatoes on my burger. Although it is quite clear that there are safe tomatoes available, the FDA has encouraged restaurants simply to cease selling them. This makes a lot of sense: rumors fly so rapidly and irresponsibly. Though, individual restaurants may take different steps; those that pride themselves on knowing the source of their heirloom tomatoes should be advertising that fact.
The problem is salmonella, in particular a strain called “saintpaul.” The FDA identified salmonella in tomatoes as a significant risk a year ago. Thus, they had the infrastructure in place to monitor and deal with the significant number of reported outbreaks this year. So far, no one knows the source of the problem, and all the FDA can do at this point is to list those tomatoes that have not been associated with the outbreaks:
• Cherry tomatoes
• Grape tomatoes
• Tomatoes sold with the stems on
• Homegrown tomatoes
In addition, the FDA lists those tomato-growing areas that have been ruled out in the outbreaks. This doesn’t mean that tomatoes grown in those areas will always be safe, but that they have not been linked to this outbreak. The FDA also reiterates its advice on the safe handling of fresh tomatoes and other fresh fruits, both in restaurants and at home. The CDC website provided a nice summary:
• Refrigerate within 2 hours or discard cut, peeled, or cooked tomatoes.
• Avoid purchasing bruised or damaged tomatoes and discard any that appear spoiled.
• Thoroughly wash all tomatoes under running water.
• Keep tomatoes that will be consumed raw separate from raw meats, raw seafood, and raw produce items.
• Wash cutting boards, dishes, utensils, and counter tops with hot water and soap when switching between types of food products.
The problem isn’t limited to the United States; New Zealand tomatoes have been implicated as well, and banned in Hong Kong. It was nice to know that the tomatoes we had with dinner last night were doubly safe: they were hothouse tomatoes sold with the stems on, and they were from British Columbia, one of the locales ruled out by the FDA.
