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?