In recent years, the food industry has experienced a dramatic increase in recalls, withdrawals and contamination events. The U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS) requested or monitored almost 100 Class I recalls involving serious health hazards related to meat, poultry and egg products in 2015, a 130 percent increase from 2010.
Class II recalls involving less serious risks of health hazards in those products rose by about 70 percent during that period. The trend continues this year. Through August, the FSIS reports 51 food safety and inspection recalls and alerts, which reflects more than a 120 percent increase from the same period in 2015.
Several factors may be contributing to the rise. First, the federal government recently began implementing the Food Safety Modernization Act (FSMA), which broadly reformed food safety in this country. The FSMA gives the Food and Drug Administration legislative authority to create and police preventative control standards.
Second, consumer preferences have changed significantly in recent years. Consumers seek “all natural” and “organic” labels on the food products they buy. While the desire for natural products is largely driven by health conscious consumers, the so-called “unnatural” components in food play an important function in protecting against spoilage and illness. Preservatives have been used to prevent contamination for decades and their removal increases the risk of contamination events.
Third, many large food companies manufacture and sell products throughout the world and are subject to widely varying standards and regulations, by country. What is perfectly safe in one country may trigger a recall or withdrawal in another.
Regardless of the reason for the increased frequency of recall events, food companies must focus on protecting themselves against this prominent risk impacting the industry. A key tool in every food company’s arsenal to help alleviate the economic and reputational consequences of a contamination or recall event is Product Contamination Insurance (PCI).
PCI coverage grants
PCI policies frequently provide coverage for: (1) accidental contamination; (2) malicious product tampering; (3) governmental recall; and (4) product extortion.
These coverages vary by insurer and, generally, provide the following:
Accidental Contamination coverage provides coverage for any accidental or unintentional contamination, impairment or mislabeling of an insured product, which occurs during or as a result of its production, preparation, processing, manufacture, labeling, processing, packaging, mixing, blending, compounding or distribution, or adverse publicity implying such; provided that the use or consumption of which insured products has resulted in or would result in clear, identifiable, internal or external visible physical symptoms of injury, sickness, or disease. Notably, some PCI policies provide a separate coverage grant for Adverse Publicity, which does not require actual or potential bodily injury to trigger coverage.
Malicious Product Tampering coverage involves the actual, alleged or threatened intentional, malicious and wrongful adulteration of an insured products so as to make the product dangerous or unfit for use, or to create such an impression to the public.
Government Recall coverage provides coverage for any recall order issued by the authorities with regard to an insured product to comply with food safety regulations, or if such a recall order is imminent, provided that the use or consumption of which insured products has resulted in or would result in clear, identifiable, internal or external visible physical symptoms of injury, sickness, or disease.
Product Extortion coverage involves a threat to commit malicious product tampering communicated to the insured food company for the purpose of gaining ransom monies or services.
Some insurers offer specialty policies that focus solely on recalls and withdraws, contamination, or a specific industry. Generally speaking, PCI policies provide a broad spectrum of coverages to protect the risks that food companies face as a result of recall, withdrawal and contamination events.
Potentially Covered Losses
While it is important to carefully analyze the policy language, which may vary significantly, PCI policies frequently provide coverage for the following losses:
- Recall costs, including medical care, product analysis, product transportation, disposal, employee overtime;
- Announcement costs, such as print, television and Internet placements;
- Loss of gross profits, typically up to a certain period of indemnity, frequently 12 to 18 months;
- The value of contaminated products, including the product that an insured destroys as part of a larger withdrawal even if all of the withdrawn product is not contaminated;
- Crisis response and consulting expenses, including public relations and recall consultants (many insurers offering PCI have dedicated crisis response teams in place);
- Increased cost of operations to return to pre-loss condition;
- Costs of rehabilitating a product and regaining the company’s goodwill and brand reputation;
- Extortion costs, including costs to professionally negotiate with an extortionist; and
- Third-party recall expenses including customer loss of gross revenue, third-party recall costs, product liability and defense costs.
It is critical that insured food companies assess as quickly as possible the extent of their losses and the scope of coverage for those losses. Insurers will request detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred in responding to that loss. Insured’s must fully understand the scope of coverage afforded by their policies to maximize the potential for recovering all covered losses.
An insured should be wary of their policies’ potential time traps. For example, a policy may obligate the insured to provide the insurer with notice of a loss “as soon as possible” or “as soon as practicable” after a loss or other insured event. Some policies require that notice be given in as little as 30 or 60 days. The consequences of failure to give prompt notice differ depending on the type of policy and the jurisdiction. But, a failure to give prompt notice may completely bar an insured’s claim.
Pursuing a product contamination claim often is a complex and challenging process, especially when management is focused on mitigating potential losses. Insureds should carefully review their coverages, comply with all policy conditions and strategically approach their insurance claims to maximize coverage and avoid pitfalls.
A key component to this approach is assembling the right team. Internal quality, legal and financial individuals should closely coordinate efforts to gather information necessary to document and quantify the losses.
External accountants who specialize in complex insurance claims may help maximize the claim by accurately computing the loss and also working with the insurer’s accountants to identify and resolve quantification differences. Coverage counsel should be consulted, as needed.
About the authors: Jared Zola is a partner in Blank Rome LLP’s policyholder-only insurance coverage practice based in its New York office. James R. Murray is the leader of Blank Rome LLP’s policyholder-only insurance coverage practice based in its Washington D.C. office.
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