The current climate of aggressive regulatory action by the FDA creates increased exposure for American businesses to liability for food contamination and recalls. A well-designed insurance portfolio may provide relief in the face of contamination and food recall events, but obstacles to coverage exist. This article examines the insurance coverage landscape in the food and beverage sector, where even subtle distinctions in policy language may prove significant. We will cover potential impediments to coverage under commercial general liability (CGL) and property policies, as well as the typical structure of and potential coverage provided by specialized food contamination and/or recall policies.
The 2010 Food Safety and Modernization Act (FSMA) empowered the FDA to issue mandatory recalls, enforced by monetary sanctions, and shifted the focus on food safety regulators to preventing, rather than responding to, contamination. FDA statistics show robust activity in recall actions – more than 80 in the first 45 days of 2015. The landscape is not always friendly to policyholders – businesses participating in all phases of production, preparation, distribution and sale of food and beverages – but prudent companies may be able to maximize the probability of insurance coverage for losses suffered as a result of contamination and/or recall.
CGL Policies: Exclusions Frequently Impede Recovery
CGL policies insure against third-party liability and expenses imposed by lawsuits or government action due to bodily injury and/or property damage, but do not cover first-party loss sustained by the policyholder. Costs attached to recalling a policyholder’s own products are arguably beyond the scope of CGL coverage. Nevertheless, policyholders face challenges in securing coverage even when faced with direct liability for a food contamination or recall.
Policyholders seeking coverage under a CGL policy must generally establish either bodily injury or property damage. Well-settled case law is instructive:
- Physical sickness triggers coverage for bodily injury. In many cases, however, intervening events may preclude actual physical contamination, threatening coverage.
- The “your product” exclusion, and its relatives, the “your work” and “impaired property” exclusions, (collectively the “business risk” exclusions) are purportedly intended to exclude coverage for damage to the policyholder’s product. Where a policyholder’s contaminated products are incorporated into another product, however, courts may find the existence of property damage (although the extent of covered damages remains an open question).
- Also acting as an impediment to coverage is the so-called sistership or recall exclusion. Over time, the sistership exclusion has grown to exclude nearly all direct expenses arising from recall. Although previous versions of the exclusion sometimes allowed for coverage where a third party instituted the recall, recent revisions have attempted to clarify that issue by excluding “loss, cost or expense incurred by you or others” because of recalls.
In determining whether their CGL policies provide adequate protection from food recall losses, policyholders should examine the relative likelihood of incurring liability to a third party for a recall event, as compared to internal expenses caused by the recall of their own products. Those companies in the latter category will likely need to purchase additional coverage.
First-Party Property Policies: Effective Gap-Filler?
Theoretically, policyholders’ first-party property policies would fill the gap left by CGL policies’ business risk exclusions. Property insurance policies are intended to cover loss to the policyholder’s property. Property policies generally respond where policyholders prove direct physical loss or damage to their property. Some courts have held that a property policy’s requirement for physical loss precludes coverage for preventative recalls where the existence of damage is speculative. Another issue may arise where contamination affects certain identified products, and other potentially affected products are also recalled or destroyed.
Regardless, coverage under property policies is often excluded by the “contamination” exclusion. For example, in HoneyBaked Foods, Inc. v. Affiliated FM Insurance Co., the policyholder discovered the presence of listeria bacteria, which had grown in an unclean hollow roller. There, the exclusion negated coverage for “loss or damages caused by [contamination including pollution].” Because the policy defined “pollution” to include bacteria, the court found the loss to be excluded from coverage.
Accordingly, policyholders may find themselves unprotected from food contamination and recall loss despite a seemingly strong insurance portfolio. Carriers now offer specialized insurance products purportedly aimed at recalls, although aggressive interpretation of those policies by insurers and courts has, at times, disappointed policyholders.
Food Contamination Policies: Increasingly Prevalent, Not Always Protective
Food contamination policies have become increasingly prevalent. According to Aon, a major brokerage firm, approximately 30 insurers offer some contamination/recall coverage. In contrast to most CGL and property policies, food contamination policies are generally unique to each insurer and amendable – for an increased premium – at the request of the prospective policyholder. The corollary is the potential for crucial gaps in coverage for unwary, uninformed or inadequately advised businesses.
While sometimes termed recall insurance, many food contamination policies do not actually provide coverage in the absence of bodily injury or at least a real possibility of bodily injury. Following an insured event, food contamination policies frequently cover, for example, lost profits, business interruption, recall expenses, investigative costs and rehabilitation expenses. Over time, the core terms of most food contamination policies have become more similar, although not nearly as standardized as CGL or property policies. The insuring agreement typically covers “Insured Events,” defined in a current Liberty Mutual offering as:
Any inadvertent or unintentional contamination or mislabeling of an insured product that occurs during or as a direct result of its production, preparation, manufacture, packaging or distribution, provided that the use or consumption of the insured product has resulted in or would result in bodily injury of any person(s), within 365 days following such consumption or use, or has caused or would cause property damage.
Again, slight differences in language could determine whether there is coverage.
Many policyholders have successfully secured coverage under their food contamination policies or at least avoided an adverse determination as a matter of law. In Hot Stuff Foods, LLC v. Houston Cas. Co., for example, the policyholder sent sausage containing MSG to a facility intended to distribute only MSG-free products. After informing the FDA of its error, the policyholder voluntarily recalled 193,507 cases of mislabeled sausage, leaving 40,000 cases in circulation. The policy covered mislabeling, “provided always that the consumption or use of the Named Insured's contaminated product(s) has, within 120 days of such consumption or use, either resulted, or may likely result in” bodily injury. Because testimony indicated that MSG consumption could cause sickness in rare cases, the appellate court found a question of fact that precluded summary judgment: “[T]he parties . . . fixed where in the range of product contamination risks coverage should end by choosing a term requiring more than a possibility of physical injury (‘may’), but less than a probability (‘likely’).”
A recent California appellate decision, on the other hand, demonstrates the pitfalls that policyholders can encounter in seeking coverage under their contamination policies. In Windsor Food Quality Co., Ltd. v. The Underwriters of Lloyds of London, the policyholder recalled burritos that included potentially contaminated beef supplied by a third party. Among the contamination risks was mad cow disease. The court precluded coverage because the beef did not constitute an “insured product” under the policy. The court summarized the policy’s “insured product” definition as requiring “contamination or tampering with its product during or after manufacture, not before [the policyholder] began the process.” Accordingly, “[i]n order for a frozen burrito to qualify as an insured product, there must have been contamination or tampering during production, manufacture, packaging, or distribution – not because one of its ingredients supplied by a third party was adulterated.”
Likewise, in Fresh Express Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, a California appellate court found that the policy at issue did not cover an E. coli “outbreak” that was not a result of the policyholders’ own negligence. The court held that the outbreak “may have given policyholder cause to believe that its products were contaminated,” but it was not an error by the policyholder and therefore did not trigger coverage.
These decisions, and others like them, demonstrate potential pitfalls policyholders face in obtaining adequate coverage for contamination and recalls even when specialized insurance is purchased. The policyholders in Windsor Food and Fresh Express acquired insurance specifically to cover recall losses, yet, when faced with the threat of contamination events involving mad cow disease and E. coli, those policyholders were left largely unprotected.
Ensuring Adequate Coverage
As noted, food contamination policies differ substantially among carriers and can be customized at the request of prospective policyholders. The standard policy offered by Liberty, for example, covers “accidental contamination,” where ingestion of the insured product “has resulted in or would result in bodily injury . . . within 365 days. . . .” Other policies, in contrast, cover only contamination resulting in injury within 120 days of ingestion (as in Hot Stuff Foods, supra), or on the other extreme, do not require even the possibility of bodily injury.
Likewise, policies may be purchased that provide (or don’t provide) coverage for product mislabeling, malicious tampering and publicity indicating contamination, even in the absence of actual contamination.
Beyond the differences in insurers’ basic forms, policyholders may purchase endorsements that presumably expand coverage for certain losses. Such endorsements demonstrate that important coverages may be sorely lacking from an insurer’s basic policy. One insurer, for example, advertises an endorsement that adds governmental recall to the policy’s definition of insured event. Many policyholders, seeing that recall expense is generally covered, would assume coverage for FDA recalls without the benefit of an additional endorsement. As the policyholder in Fresh Express learned, however, many recalls are not insured events in the first instance, and a policy’s coverage of recall expenses is of no avail absent a triggering insured event.
Prospective food contamination policyholders should secure adequate advisement from experienced professionals and compare different insurers’ policy forms prior to purchasing coverage. In the event of a claim, careful examination of policy language is likewise crucial.
Published March 13, 2015.