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?
Government Assistance for Rotten Tomatoes?
I recently received a call from a reporter about legislation introduced by Representative Tim Mahoney (D-Fl), that would provide “emergency assistance to growers and first handlers of tomatoes.” The text of the bill, HR 6581, as referred to the House Agriculture Committee reads as follows:
SECTION 1. EMERGENCY ASSISTANCE FOR GROWERS AND FIRST HANDLERS OF TOMATOES.
(a) Emergency Assistance - There is hereby appropriated to the Secretary of Agriculture $100,000,000, to be available until expended, to make payments to growers and first handlers, as defined by the Secretary, of fresh tomatoes that experienced crop or market losses, or both, as a result of the Food and Drug Administration Public Health Advisory issued on June 7, 2008.
(b) Payment Amount - The amount of the payment made to a grower or first handler under this section shall not exceed 75 percent of the greater of--
(1) the value of the unmarketed tomatoes; and
(2) the actual loss incurred by the grower or handler.
The reporter asked whether those intended to receive financial assistance under the bill would be compensated some other way, such as insurance payments. She also questioned the fairness of this legislation.
The answer to the first question—will producers receive insurance payments—is most likely no. Some producers and sellers maintain recall insurance (or perhaps some form of business interruption insurance). As discussed previously in this blog, recall insurance may not cover events that are not “recalls.” In this case, FDA never requested a recall. Even for forms of recall insurance that may offer coverage for events other than a recall, insurers may argue against coverage because it turns out that there is no evidence that tomatoes were the culprit of the Salmonella Saintpaul outbreak. The bottom line is that few, if any, producers or sellers may receive insurance payments for their business losses (estimated to be in the hundreds of millions of dollars).
Although many “fault” FDA, tomatoes have been linked to previous outbreaks. FDA’s warning about tomatoes was the food equivalent of rounding-up the usual suspects.
Yet, government relief may still be justified and, therefore "fair." Events leading to the losses suffered by producers and sellers (many of whom are small businesses) were fortuitous and beyond their control. While relief may not be justified because of some "fault" by the federal government, government relief may be justified as “disaster relief.” If relief is justified for agriculture wiped out by floods or other acts of God, why is not fair for those same farmers and producers to be compensated for this kind of disaster?
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.
