Despite government regulation, numerous safety precautions, and a public more knowledgeable about the spread of bacteria, food contamination and its subsequent effects continue to cost businesses, citizens and the United States government over $6.9 billion each year.
The outbreak of a food-borne illness or a product recall can devastate a company. As recently as last month, the owner of Jeni’s Splendid Ice Cream was concerned that a recall related to listeria would be the end of the company.
The risk is not limited to food growers or manufacturers either; shippers, grocers, restaurants and others involved in the food industry may bear the costs of a contamination. All hope is not lost for businesses in the food industry - insurance is an important risk management tool to protect against the costs of a catastrophe. And, companies that carefully review their policies to ensure that claims related to product recall and contamination are covered under their commercial general liability (CGL) policy or first-party property insurance policy will be a step ahead.
Typically, a CGL policy provides defense and indemnity for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ and ‘property damage.’” However, insurance companies have asserted that several provisions in CGL policies operate to limit coverage for claims from food contamination. Insurers have asserted that exclusions for “mold,” “contaminants,” and “pollution” apply to bar claims related to food products. Further, insurers have asserted that coverage for claims that arise out of the company’s own negligence in the manufacturing, packing or distribution of food products are excluded under the “your work” exclusion. Lastly, insurers have asserted that CGL policies do not cover costs associated with a recall where the policyholder was not the source of contamination, because there was not an “accident” caused by the insured. While insurance companies have seen limited success with these arguments, there are instances where courts have upheld an insurer’s denial of coverage.
Commercial Property Coverage
First-party property policies provide coverage for losses stemming from damage to a company’s own property, and may provide coverage for business interruption losses the company incurs while handling the contamination outbreak. While it would seem like first-party policies cover the losses that are not covered by CGL policies, recent case law has suggested that may not be the case. Insurance companies have asserted that preventative recalls, where it is undetermined whether the insured is responsible for the outbreak, are not covered under property policies. The insurers claim that no physical loss or damage has occurred as required by the policy. Additionally, insurers rely on the contamination exclusion to deny coverage. The contamination exclusion provides that the policy does not insure against loss caused by contamination, except where there is resulting physical damage or other physical damage. Accordingly, policyholders may find it difficult to determine whether their companies are insured for claims arising from food contamination.
Specialty Insurance Policies
Insurance companies have begun offering specific loss policies designed especially for the food industry. In many cases, product contamination or recall insurance will provide clearer and more substantial coverage for the costs associated with a recall or outbreak. Contaminated Products Insurance covers recall costs, loss of gross profits and costs associated with an actual or threatened, accidental or malicious contamination. Further, events other than a lawsuit or actual physical damage to the policyholder’s property can trigger coverage under the policy. While litigation of the terms of contaminated products insurance is still relatively recent, there are judicial decisions that have interpreted the policy language in a manner that limited coverage to the insured. Therefore, policyholders must carefully read the policy language even if it was purchased to cover a specific type of risk.
In acquiring insurance coverage to protect the company, there are several items that the policyholder needs to remember. First, the company needs to anticipate its food liability risks and insurance needs. Particularly, the company should consider whether they are covered for both first- and third-party risks and when the policies will respond in the event food contamination is suspected. If the company still has significant exposure to risk, the company should consideradditional coverage tailored specifically to the food industry. Lastly, the company should consult with insurance coverage counsel to determine the next steps and to ensure, in the event of a claim, that the company obtains the insurance coverage to which it is entitled.