The practical reality for most growers and manufacturers, even those with the highest food safety standards, is that at some point they may have to manage a food safety event and ultimately issue a product recall. Therefore, many growers and produce manufacturers breathed a sigh of relief with the availability of recall insurance, with high hopes that this insurance product would be a mitigating factor when a food safety event arose.
Like many insurance products, recall insurance is not always what it seems. A careful read of policy terms when you are shopping and comparing products is critical along with an awareness of the requirements of a policy throughout any food safety event.
In the past, produce companies have only held Commercial General Liability (CGL) policies. CGL policies are typically designed to provide coverage for third-party claims for personal injury or property damage and, unless there is a specific endorsement for extra coverage, provide little if any coverage for recall expenses. A consumer who gets ill as a result of eating contaminated product would seek coverage for damages under a company’s CGL policy. Recall costs borne by the company itself, however, would typically not be covered and are generally excluded.
All recall policies are different and will provide different levels of coverage, but traditionally coverage will extend to five basic categories: (1) Business interruption, (2) Lost profits, (3) Recall expenses, (4) Rehabilitation expense to rebuild the company brand’s image, and a (5) Crisis fund to respond to adverse publicity. Within these categories there is typically broad coverage for items such as transportation and disposal of the products, additional personnel and overtime, cleaning equipment and extra sanitation expenses, lab analysis, brand rehabilitation costs, and consultant expenses, including crisis management professionals, scientists, public relations specialists and legal experts.
Since the coverage varies, a produce company will first need to consider the priorities for coverage in a food safety event. A company with a large brand presence will want to focus on brand rehabilitation coverage as opposed to a company that only provides product under private labels, who may be focused on availability of coverage for cost reimbursement to downstream parties that may be excluded absent a specific endorsement.
Shopping for insurance products starts with completing an application. Insurance companies assess risks based upon information included in the application. State law and express policy terms may allow an insurer to rescind coverage if there was an intentional or even a negligent misstatement of a material fact in the application. This is the case under California law where the presence of a false representation of a material fact in the application entitles the insurer to rescind the policy. Moreover, courts have traditionally held that the qualification of a misrepresentation as intentional or negligent does not affect the insurer’s right to rescind the policy. Further, policies will also have specific language providing the insurer rights to void the policy in instances of any “false swearing” or “attempt to defraud,” which may be broadly construed.
In light of these legal requirements it is important to consider the accuracy of the information in the context of the format of the question on the application. Many applications contain a check-the-box format for certain responses, however, the realities of business conduct are not so clear cut. For instance, a common question on recall insurance applications is whether or not a company receives indemnification from suppliers. Many businesses would tend to mark “yes” as it is the company’s practice to get signed purchase orders in place that include an indemnity in favor of the purchaser, however, at times, spot purchases may occur and standard procedures are not followed. This could be a basis for denying coverage. Accordingly, where there is a check-the-box, produce companies should not hesitate to add additional information to qualify the statement to match the realities of their business.
Produce companies also need to pay attention to the actual products, geographies and any entities a party intended to have covered by the policy. Typically, underwriters will request detail regarding sales, geographies, product offerings and entities that a party intends to have covered by the policy. However, due to the realities of business operations all of these are subject to adjustment throughout the term of the policy. In this instance, you need to let your broker or underwriter know these facts because failure to do so could again result in a denial of coverage. Consider your policy as you expand your business into new geographies or work through a merger or corporate restructure. In order to maintain coverage there needs to be ongoing management of the policy as your business expands and changes.
Consultants are often relied upon as a valuable resource, and may be one of largest expenses in a recall event. Most policies cover the costs of engaging consultants during and after recall events, however, this may also apply to only those consultants that are preapproved and included on the application or where a company notifies the underwriter of the use of a particular consultant within 48 hours of the consultant’s engagement. This requirement includes consultants used post recall for brand rehabilitation and other covered purposes that you may not have previously worked with or previously considered, however, failure to follow the processes outlined in the policy and on the application may result in denial of consultant costs.
Another issue to consider is what triggers coverage under the policy. One would think it would be a company’s issuance of a recall, but this may not always be the case. A company’s mere issuance of a recall is not always all it takes to trigger coverage. Typically, the company also has to believe that there is a potential of bodily injury, disease or death. Although these criteria are in line with recall standards, a company may issue a recall for other reasons. Many policies also allow for coverage when a party has reasonable cause to believe that the use or consumption of their products has led or would lead to serious bodily injury. Other policies require that consumption or use of the product either resulted, or may likely result, in bodily injury.
Under most policies it remains to be determined whether absent bodily injury or a reasonable realistic concern for bodily injury there would actually be coverage. Certain exclusions may apply specifically denying coverage in situations such as competitor recalls despite the competitor recall having an inevitable profound effect on your business and result in customers refusing your products. Additionally, consider situations such as competitors issuing recalls for product grown in close proximity to yours, or where the FDA or another government agency determines that a recently expired product should be recalled, recent FDA actions such as FDA’s broad based “do not consume” orders, recalls that have an effect on non-recalled product, and product withdrawals that do not raise to the level of a recall as no product has gone to market. In these situations, companies may believe their processes and shelf life support their belief that no consumer is subject to harm, however, the company may still issue a recall to comport with FDA or customer pressure or mandates. When reviewing your existing policy or selecting a policy, consider all of these nuances and fact patterns against policy terms to determine actual coverage in light of the realities of your business during a food safety event.
Finally, once you do have a policy in place and are working through a food safety event, take special note of policy requirements. Some policies dictate the use of the underwriters’ crisis management team, who you may not have met and who typically have little knowledge of the intricacies of your business. Most policies also have specific reporting and notice requirements. Failure to do so within any time limits dictated by a policy likely will result in a denial of coverage. Typically, reporting will be required immediately upon knowledge of an event (this may be knowledge of a specific person such as the CEO). The company will also be required to provide periodic updates during an event, and to provide an initial statement of loss within a certain timeframe after the first notice. Throughout a recall, most companies will be focused on protecting their customers, consumers and stakeholders, and may not be focused on securing policy rights. Recall preparedness must include an understanding of policy requirements and considering such requirements throughout the policy to maintain coverage.
In summary, recall policies can be an extremely useful tool in mitigating the costs and expenses of a recall and have the effect of allowing your company to move through a food safety event with the least amount of financial impact to stakeholders. However, given that recall policies are expensive and retention or deductibles are typically high, companies need to consider the value of the policies currently available against the realities of their produce business. In order to receive coverage, companies need to select the proper product, applications should be thoughtfully completed, and policy requirements should be strictly adhered to during and after a food safety event.