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Protect Against Food Contamination Losses
by Donna L. Wilson and Elissa Tomanda
Salmonella. Escherichia coli. Listeria. These words strike fear in the hearts of in-house counsel and executives in the food industry. Outbreaks of foodborne illnesses—and other incidents involving tainted food—have received a great deal of attention in recent years. In 2007, they reached a new peak: an outbreak of botulism infections caused by canned chili, a recall of more than 21 million pounds of ground beef and hamburger patties due to fears of E. coli contamination, a peanut butter recall related to Salmonella poisoning outbreaks in 47 states, and a recall of baby food allegedly tainted with Salmonella. For the companies involved, the inevitable fallout will include defense and liability costs incurred in large-scale litigation, including consumer class actions, losses due to product recalls and business interruption, damage to reputation, and in some cases, bankruptcy.
Given the risks, businesses in the food industry must assess their insurance portfolios and consult insurance coverage counsel now, before becoming involved in lawsuits and incurring liabilities. Companies defending personal injury lawsuits stemming from foodborne illnesses should confirm insurance coverage immediately, because it may cover such lawsuits. Below, we discuss in more detail the actions that food industry in-house counsel and executives should take to purchase insurance policies that cover the risks associated with food handling—including comprehensive general liability policies—and product recall and foodborne illness coverage. We also discuss some steps that in-house counsel and executives can take to ensure that they obtain the full insurance coverage they are entitled to if their company is the subject of a tainted food claim.
A few facts concerning foodborne illness in the United States from the Centers for Disease Control and Prevention help put the risks faced by companies in the food industry into perspective. Approximately 76 million cases of foodborne illness occur in the United States annually. Approximately 325,000 of those illnesses result in costly hospitalizations, and about 5,000 of them are fatal.
According to one estimate, the medical costs, productivity losses, and costs of premature deaths related to five of the most common foodborne illnesses combine for a total of approximately $6.9 billion in losses annually. There are more than 250 known diseases that can be transmitted through food—most of them caused by bacteria, viruses, and parasites, while others are caused by poisonings from harmful toxins or chemicals. These make up about 20% of all foodborne illness; the other 80% are thought to be caused by unknown or undiscovered agents.
Tainted food incidents can lead to several types of losses for a company. Companies can face millions of dollars in potential liability, in addition to incurring significant defense costs, arising from consumer allegations that they were injured by tainted food. For example, in 2003, a Chi-Chi’s restaurant customer near Pittsburgh, Pa., contracted hepatitis and was forced to undergo a liver transplant. That customer, one of more than 600 people affected by an outbreak eventually traced back to green onions, received $6.25 million to settle his claim.
A $12 million settlement was reached on behalf of five children allegedly injured by drinking E. coli-contaminated Odwalla apple juice in 1996. In the 1993 E. coli outbreak traced to Jack in the Box fast-food restaurants, approximately 600 people were affected; the most seriously injured person settled for $15.6 million. One of the many law firms that specialize in representing consumers in such cases estimates it has obtained hundreds of millions of dollars from food companies and their insurers in court verdicts and settlements.
In addition, companies can face huge losses arising from product recalls. Last year, the Topps Meat Company (Elizabeth, N.J.) was forced into bankruptcy after 67 years in business due to the costs of recalling millions of pounds of meat allegedly at risk of being tainted with E. coli. Following the February recall of 143 million pounds of beef, the Hallmark/Westland Meat Packing Company (Chino, Calif.) may also be forced to file for bankruptcy, and its general manager has said it will probably never reopen.
Companies can suffer significant losses if allegations of food contamination lead to business interruption; for example, a plant may be closed during the course of a Food and Drug Administration investigation. Companies can also face long-term losses due to the damage caused to their reputations.
Insurance can be a valuable resource, ensuring that your company survives such losses. Indeed, according to one well-known food liability plaintiffs’ lawyer, over the past 10 years his clients have received at least $100 million from one insurance company alone. And, reportedly, in the case of the Jack in the Box lawsuits, approximately $100 million in settlements were made possible by insurance.
Types of Coverage
Long before a risk becomes a reality, companies should consider purchasing the following types of insurance, each of which may provide coverage for certain food-related losses, costs, and liabilities.
Comprehensive general liability (CGL) policies typically cover third-party claims for bodily injury or property damage arising during the policy period. In addition to paying the liability a company may incur through either a verdict or a settlement, CGL policies also typically require the insurer to defend lawsuits against the policy holder, such as those alleging foodborne illnesses. That “duty to defend” is broadly defined. Regardless of the merits of the claim, or whether the plaintiff is capable of winning its case, the insurer may be required to pay the costs of defending a tainted food claim. Given the substantial costs companies may incur in defending against food liability claims, it is probably worthwhile to purchase such insurance for the defense costs alone.
First-party property insurance provides coverage for losses arising from first-party property damage or, in other words, damage to a company’s own property. Depending on the terms of the policy and the type of damage, such insurance may cover the loss of contaminated food itself, although courts have reached different conclusions on the issue.
Some insurers offer specific loss policies, including those designed especially for the food industry. For example, restaurant policies can be purchased for all types of dining establishments. These policies allow the policyholder to select from a wide range of different types of coverage, including general liability, property, equipment breakdown, and spoilage.
Other insurers offer foodborne illness policies and trade name restoration policies. Such policies typically cover business losses arising from business interruption and damage to business reputation and are designed to provide assistance in reputation crisis management. Some cover only the specific foodborne illnesses listed in the policy, while others provide more comprehensive coverage.
In certain circumstances, coverage can be added to the types of policies discussed above in order to fill perceived or, arguably, potential gaps in coverage. For example, a company in the food industry may be interested in adding coverage for product recalls, which insurance companies often argue are excluded from coverage under CGL policies.
Another example of add-on coverage is business interruption insurance, which covers loss caused by a product line shutdown but often only applies where there is also physical damage to the property. Depending on the terms of the policy, this type of insurance may cover losses that arise from a management decision to shut down a certain product line because of contamination. If a processing facility suffers a fire that causes physical property damage and contamination, business interruption insurance will likely step in to cover the losses.
Directors and officers (D&O) liability insurance covers claims of alleged “wrongful acts” by company officers and directors, such as shareholder suits relating to incidents of wide-scale food contamination. Depending on the terms, a D&O policy may cover the costs of defending such claims, as well as the costs of paying settlements or adverse verdicts.
Need and Negotiations
When securing insurance coverage that will protect your company and its customers, there are several key things to remember. First, anticipate your company’s food liability risks and insurance needs. At the time of policy renewal, or at least annually, ensure that your risk management team and legal counsel meet to discuss anticipated risks, review the company’s past claims experience, and analyze developments in the industry. Once they have identified and prioritized the risks and considered worst-case scenarios, companies should coordinate with their insurance broker, risk manager, and insurance counsel to consider the entire range of available types of insurance coverage, including those discussed above, for losses arising from incidents of alleged contaminated food.
Second, negotiate with the insurer when purchasing coverage. Your company’s ability to negotiate likely will depend on the type of coverage sought, the insurer’s past claims experience with your specific company and the food industry generally, and how “hard” or “soft” the market is in a given year. If you believe that the insurance offered by an insurer does not adequately protect you from anticipated risks, shop around and negotiate.
Do not be penny-wise and pound-foolish. For example, if your company intends to purchase only a CGL policy—and product recalls are expressly and unequivocally excluded from coverage—either negotiate with the insurer to fill the gap in the policy or purchase add-on insurance. Do not forgo that additional coverage without carefully considering the risks and benefits of doing so. If your company is involved in a tainted food incident, the increase in premium, in hindsight, may seem like a small price to pay.
In addition, carefully review your company’s policies, looking especially for potentially limiting language and exclusions. Before the policy is issued, the risk manager should obtain a complete draft and review it closely. Also, make sure the final version of the policy accurately reflects the coverage you intended to purchase. If a provision seems ambiguous, seek to clarify it or, if necessary, consult with coverage counsel to obtain that clarification. Be on the lookout for potentially limiting language and exclusions, which in the food contamination context can range from so-called “vermin” and “pollution” exclusions to product recall (“sistership”) exclusions. All policies should then be copied electronically and secured off site. In these days of natural and man-made disasters, the company should not rely on the broker alone to safeguard its insurance policies.
If a claim arises, immediately notify the insurer. Many policies require that the policyholder provide notice “as soon as practicable,” while others require that notice be provided “immediately.” This step is crucial and will help your company avoid giving the insurer an opportunity to argue that you lost the coverage you paid for by failing to provide proper and timely notice. Do not hesitate to give notice due to concern about jeopardizing your relationship with your insurer. You paid for the insurance, and you should avail yourself of its benefits. The moment a contaminated food incident arises, you should contact insurance counsel, who will assess your coverage and assist you in providing the appropriate notice under all potentially available insurance policies.
Finally, do not accept “no” for an answer. In the event you are denied coverage, do not walk away. Never assume that the insurer has your best interests at heart or that a court would agree with the insurer’s reasons for denying your claim. Instead, consult with insurance counsel to determine your next steps and to ensure that you obtain the insurance coverage to which you are entitled. Remember—countless companies have obtained billions of dollars in insurance coverage despite their insurers having initially denied coverage.
These ground rules can help businesses avoid some of the risks associated with food product contamination. Companies should bear in mind that no sector of the food industry is immune to foodborne illness claims. All companies should maintain sufficient insurance coverage, even those that are taking all possible health and safety precautions, and should form a relationship with insurance coverage counsel before any food-related contamination occurs. Hopefully, your company will never have to use this valuable insurance asset.
Wilson is a partner and Tomanda is an associate in the insurance recovery and litigation practice groups at the Washington, D.C., offices of Kelley Drye & Warren. Reach them at firstname.lastname@example.org, email@example.com, or (202) 342-8400.