It seems like every month a new food is being recalled. Ever since the advent of the Food Safety Modernization Act (FSMA) in 2011, there has been an increase in food recalls. However, this increase is not an indication that manufacturing and packaging facilities have become lax or negligent but the result of higher standards, increased inspections and an attempt to proactively prevent contamination instead of simply responding to outbreaks. In addition to these changes, the FSMA now allows the government to issue a mandatory recall when there is evidence or concern that a food item could be contaminated instead of relying on the companies to issue voluntary recalls. As a result, recalls are now issued when a product could potentially be contaminated. To date, companies have always initiated voluntary recalls. Food recalls can be very expensive and it is important to know if your damages are covered by your commercial general liability (CGL) policy and, if so, to what extent?
A voluntary or mandatory food recall can raise a first- or third-party coverage issue. For first-party claims, the policyholder seeks coverage for its own losses resulting from a recall such as the actual costs of the physical recall (i.e. transportation, storage, disposal), public relations, and business interruption or lost sales. For third-party claims, the policyholder seeks coverage for damage to a third party who incorporated the recalled product such as business interruption or lost profits, and costs of purchasing replacements for the recalled product. As an example, in Sec. Nat’l Ins. Co. v. GloryBee Foods, Inc., 2011 U.S. Dist. LEXIS 27267, GloryBee sought recovery for damages suffered by Nature’s Path due to a recall issued by GloryBee. Nature’s Path sued GloryBee after purchasing 80,000 pounds of roasted peanuts that GloryBee recalled. In turn, Nature Path had to recall its products which incorporated the recalled peanuts and, as a result, incurred damages of loss of value and the expense of recalling the product. Although GloryBee’s insurance policy did have several exclusions regarding food recalls, none were applicable and the Court found Nature Path’s third party claim was covered under GlroyBee’s insurance policy.
Companies encounter numerous hurdles when seeking coverage for food recalls. These challenges can occur when the recall encompasses or damages a product that is not actually contaminated. In Torres Hillsdale Country Cheese v. Auto-Owners Ins. Co., 2013 Mich. App. LEXIS 1547, Torres produced and sold cheese products. In 2009, when the Michigan department of agriculture randomly tested Torres’ products it revealed the presence of Listeria, a harmful bacterium. Torres issued a recall. However, the seizure of products included cheese that was not contaminated but could not be sold because by the time the product was released it had passed its expiration date. In this case, coverage was denied because the policy did not cover any loss due to delay, loss of use, loss of market or any loss due to the acts or decisions of any person, group, organization or governmental body. Another relevant case is Little Lady Foods, Inc. v. Houston Cas. Co., 819 F. Supp. 2d 759. In this case, testing on Little Lady Foods burrito products and equipment indicated the presence of listeria-related bacteria. Of the seven listeria strains of bacteria, only one, listeriosis, is likely to cause physical symptoms of bodily injury, sickness, disease or death in humans. Little Lady Foods notified the USDA and its customers and placed a hold on the product. Further testing to the product revealed listeriosis was not present. After the burrito products were cleared and the hold was lifted, some of the products were sold on the secondary market. However, some of the product had to be destroyed resulting in monetary damage. Due to the fact that there was no actual contamination, the Court determined there was no insurance coverage for the loss.
If you are in the food industry or any of your products are used in this manner, it is imperative that you review your policies to see what damages will be covered and determine the extent of your exposure and future risks. While your CGL policy may provide coverage for some of your food recall damages it may also leave you exposed. If your current insurance does not provide adequate coverage you should talk to your broker about specialized insurance policies such as consumable product policies, component part policies, consumer goods policies and packager protection policies.