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From: Food Quality & Safety magazine, December/January 2011

Insure Against the Inevitable

Recalls happen, so be sure your insurance can cover you

by Shawn Stevens

If you think a recall is unlikely, or that you’ll be covered in the event it happens, think again. From a food safety standpoint, we are living in a dynamic and fast-changing world. Because microorganisms exist naturally in our environment, they will continue to find their way into many of our foods. Given recent improvements in national foodborne illness outbreak surveillance, more illnesses are identified and more outbreaks are reported.

By extension, these outbreaks are associated with an increasing number of foods, and more companies are affected, either directly or indirectly. Thus, if your company has not yet been confronted with an alleged foodborne illness, associated with an emerging outbreak, or involved in a resulting recall, chances are it will in the future.

In the food industry, we also know that the potential downstream consequences of any upstream food safety problem can be catastrophic. If a single raw material supplier unknowingly introduces contaminated ingredients into the supply chain, each of the downstream products manufactured with those ingredients will be affected. As demonstrated in many recent outbreaks and recalls, the actions of a single supplier can impact thousands of downstream products processed by hundreds of different companies.

More Demands that Suppliers Test

But the analysis doesn’t stop there. To help mitigate such risks, at least in part, more companies are demanding that their raw material suppliers test their products for foodborne pathogens. Many companies are also increasing their own internal sampling and testing their outgoing products as well. A higher number of ingredients and food products sampled and tested by industry, however, will translate directly into more positive findings. Under the U.S. Food and Drug Administration’s (FDA) Reportable Food Registry, which first went into effect last year, any such positive findings obtained from products that could adversely affect the public health must be reported to the agency. Of course, this can, and has in many instances, led to additional widespread recalls.

Thus, regardless of whether foodborne contaminants are identified through internal testing or whether they escape detection until downstream illnesses are reported, all food companies must recognize that massive and widespread recalls can and will continue to occur. To enhance protection against these seemingly uncontrollable risks, all food companies should carefully assess their existing insurance policies and consider obtaining standalone food recall insurance.

While the merits of continuously assessing existing insurance seem obvious, the most important reason for a thorough review may not be readily apparent to the vast majority of food companies. Over the years, we have seen numerous food companies discover shortcomings in their coverage, or their insurer, long after a significant problem or crisis arose.

In some cases, food companies were told by trusted brokers who had no real experience in the food industry that they had coverage under a commercial general liability (CGL) policy for certain contingencies, when coverage did not in fact exist. Alternatively, some companies have purchased recall and business interruption insurance, only to discover later that the fine print actually excluded the specific problem they worried about most. And, in some cases, when companies had not negotiated or been afforded the right to select their own expert counsel, the lack of access to crisis resources and adequate representation created significant risks and problems when bet-the-company issues arose.

Assume a Product Recall Will Occur

Thus, starting with the assumption that your food company may someday find itself embroiled, either directly or indirectly, in a food product recall, it is critical to determine—today—whether you are adequately protected under your existing CGL coverage. Because most CGL policies do not cover recall-related losses such as direct recall costs, business interruption losses, and lost profits claims from suppliers, you should also assess your need for separate recall, business interruption, or other types of insurance.

If your current insurance does not cover recalls, you should of course consider whether, and at what level, this type of insurance is really needed. In the end, the decision to buy recall insurance should be driven by actual demonstrable risks. We often consult with clients to identify their greatest vulnerabilities and then help them determine, given the level of risk, whether recall insurance would be appropriate. The answers to these questions, of course, vary greatly depending upon the specific operation and food products at issue. Moreover, while recall insurance has been quite expensive over the last few years, premiums are beginning to normalize with additional competition. This trend will continue as awareness increases and more insurers begin offering this type of insurance.

Finally, before any final decisions are made, it’s also imperative to understand that, in the food industry, there is no such thing as a standard or uniform approach to recall insurance. There are many different types, and the scope of coverage from policy to policy can vary greatly. In addition to the different types and levels of coverage, there can also be significant differences between the insurance companies themselves, what they charge, and how they respond when a company faces a crisis.

It is critical for food companies to understand that the risk of being affected by a recall, either directly or indirectly, is substantial. In turn, companies should carefully review and audit their existing insurance to ensure adequate coverage in the event of a recall. Finally, when questions arise or additional advice is needed, food companies should not hesitate to seek out expert help. A knowledgeable food safety lawyer can provide critical insights for companies who want to check whether their existing or proposed coverage will indeed protect against outbreak and recall-related contingencies.

In the end, when insuring against the inevitable, make sure you’re actually insured.

Stevens is an attorney at Gass Weber Mullins LLC in Milwaukee, Wis. Reach him at stevens@gasswebermullins.com or (414) 224-7784.

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