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.