Insuring Your Business Against Food Contamination Claims
Does your business manufacturer, sell, or serve food products? If the answer is yes, your company could be the target of a food contamination claim. Such claims can affect virtually any business in the food industry including farms, restaurants, grocery stores, food processors, and manufacturers.
Incidents of food contamination are common. According to the Centers for Disease Control and Prevention (CDC), approximately 48 million Americans become ill every year due to a foodborne illness. Of the people who get sick, 128,000 are hospitalized, and 3,000 die. Foodborne illnesses may be caused by bacteria, viruses, parasites, or chemicals found in food.
New Federal Legislation
Most of the nation's food supply is overseen by the Food and Drug Administration (FDA), a federal agency. The FDA regulates all domestic and imported foods other than meat, poultry, and eggs (these foods are overseen by the U.S. Department of Agriculture). The FDA's authority was expanded in 2011 by the passage of the Food Safety Modernization Act. The Act enables the FDA to be proactive. The agency can now focus on preventing foodborne illness rather than just responding to it. Here are some of the law's key features:
- It requires the FDA to mandate comprehensive controls across the food supply in order to prevent foodborne illness.
- It gives the FDA new authority to inspect food producers and processors.
- It gives the FDA the authority to compel a company to recall its products. Previously, the agency could only recommend a recall.
- It allows the FDA to collaborate with other government agencies to help improve food safety.
As noted above, the FDA now has the ability to force a product recall. Many food products are recalled because they are (or may be) tainted with harmful bacteria or because they contain potential allergens (such as milk or peanuts) that aren't mentioned on the label. You can find a list of all food-related recalls that have occurred within the last 60 days on the FDA's website.
How a Contamination Incident Affects Your Business
An incident involving food contamination can severely impact your business. It can cause property, and liability losses that may not be covered by your insurance policies. It can also seriously damage your company's reputation.
First, food products may become contaminated while they are being manufactured or stored at your company's business location. Contaminated products cannot be used so they will have to be disposed of or destroyed. Your business will sustain a financial loss consisting of the value of the contaminated products plus the cost of their disposal or destruction.
Secondly, a business that sells a contaminated food product may be forced by circumstances or the FDA to withdraw the product from the marketplace. Recalling products you have already sold is time-consuming and expensive. In some cases, your business may be forced to shut down all or part of its operations. Like a recall, a shutdown may be voluntary or required by a government agency. In either case, your business will likely lose income during the shutdown and for some time afterward.
A third risk associated with contaminated products is third-party claims. Individuals who have been injured or become ill from a tainted product may sue your company for damages. Your business may also be sued by other companies that purchased the contaminated product and lost money as a result. For example, a cookie manufacturer is forced to recall cookies after learning that nuts it purchased from a processor are tainted. The cookie manufacturer sues the processor for the costs associated with the recall.
Finally, a food contamination incident can damage your company's brand and its reputation. Customers may shun your business for weeks or months after the incident, even if they never bought the tainted product or became ill. Luring them back won't be easy. You'll need to convince your customers that you have fixed the problem and that it won't happen again.
Commercial Property Coverage
For a loss of contaminated food to be covered by a commercial property policy, the food must qualify as insured property and the damage must result from a covered cause of loss. Most commercial property policies cover loss or damage by any cause that isn't specifically excluded. If the peril that caused the food contamination isn't excluded, the loss may be covered.
Note that virtually all property policies exclude damage caused by pollution or fungus (mold). The fungus exclusion applies to bacteria as well as mold. Some policies exclude damage caused by contamination. However, the fungus, pollution, and contamination exclusions typically contain exceptions. Damage caused by pollution, fungus or contamination may be covered if the damage is the direct result of a peril (such as fire) listed in the exception.
If your business is forced to shut down due to a food contamination event and you lose income as a result, will your business income insurance cover the loss? The answer is maybe. Coverage will apply only if the shutdown results from physical damage by a covered peril to property at your premises. Income you lose due to a shutdown caused by contamination of food with bacteria or mold is not likely to be covered.
Food Contamination Endorsement
If your business is forced to shut down due to the discovery (or suspicion) of food contamination, your company will likely lose income and incur extra expenses. These losses can be covered under an ISO Food Contamination endorsement added to your property policy. Coverage applies only if the shutdown is ordered by the Board of Health or another government agency. The endorsement covers the following:
- Expenses to clean equipment as required by the governmental authority
- Cost to replace food actually or suspected to be contaminated
- Costs of medical tests and vaccinations for employees (unless these costs are covered by workers’ compensation insurance)
- Loss of business income beginning 24 hours after you receive the notice of closure
- Additional advertising expenses incurred to restore your firm's reputation
The expenses listed above are subject to an annual aggregate limit. No coverage applies to government-imposed fines or penalties.
General Liability Coverage
Claims filed by customers for illnesses contracted from contaminated products should be covered by your company's general liability insurance. A general liability policy includes coverage for product liability claims. This coverage applies to claims for bodily injury or property damage that takes place away from your premises and occurs when the product is no longer in your physical possession.
If your business sell products that are consumed on your company's premises, your insurer will probably add an endorsement called Products/Completed Operations Redefined to your liability policy. This endorsement eliminates the requirement that bodily injury or property damage must occur away from your premises to quality as a products-completed operations loss. The result is that an illness a customer sustains from eating food on your premises will be covered as a products-completed operations loss, not a premises-operations loss.
General liability policies contain certain exclusions that may be relevant to an incident of food contamination. Virtually all policies exclude claims arising from pollution. They also exclude damages or expenses associated with product recalls. Some policies exclude mold-related claims.
Product Recall Endorsement
As mentioned above, a general liability policy does not cover the cost of recalling products from the market. Nevertheless, some of these costs can be covered under an ISO endorsement entitled Limited Product Withdrawal Expense Coverage. The endorsement covers certain expenses you incur when a product of yours must be recalled because it contains a real or suspected defect, or because it has been tampered with. For coverage to apply, the product defect or tampering must have caused (or be expected to cause) bodily injury or physical injury to tangible property.
The Limited Product Withdrawal endorsement does not cover damages against you by someone else who has incurred expenses to withdraw your contaminated product from the market. For example, your company supplies wheat flour to a local bakery. You discover that a disgruntled employee of yours tampered with a batch of flour, contaminating it with a powdered fertilizer. You notify the bakery, which is forced to withdraw 300 loaves of bread it sold that contain the tainted flour. If the bakery sues you to recoup the costs it incurred to recall the bread, the damages will not be covered by the endorsement.
Some insurers have developed their own product recall expense endorsement. These endorsements may be broader than the standard ISO version.
Contaminated Products Insurance
The endorsements described above cover only some of the risks associated with contaminated food. Broader coverage is available under a contaminated products policy. Contaminated products insurance is designed for manufacturers or distributors of products that may sicken consumers if they become contaminated. Examples are food (including pet food), pharmaceuticals, cosmetics, and herbal supplements.
Contaminated products policies are not standardized so coverage varies from one insurer to another. Policies typically cover first-party recall expenses and damages arising from third-party claims. Coverage is often initiated by the accidental contamination (including mislabeling) or malicious tampering of the insured's product. Malicious tampering is usually a defined term. It generally means the intentional alteration or contamination of a product that causes the product to be dangerous or unfit for its intended use.
Tampering may be covered whether the perpetrator actually contaminates the product or merely threatens to do so.
Here are some of the coverages a contaminated products policy is likely to include:
- Damages resulting from third-party claims
- Defense coverage for third-party claims
- Product recall costs
- Cost of destroying or disposing of contaminated products
- Loss of value of contaminated products
- Loss of income and extra expense
- Product extortion costs
- Cost of hiring a crisis management consultant
- Cost of rehabilitating your company's brand to restore customers' confidence