Insuring Your Business Against Food Contamination Claims

The FDA Can Now Force Product Recalls

Colorful cupcakes

If your business manufactures, sells or serves food products, it 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. Food may be contaminated with bacteria, viruses, parasites, or chemicals, any of which can cause illness. According to the Centers for Disease Control and Prevention (CDC), 4,060 outbreaks of foodborne illness occurred in the U.S. in 2017. These triggered 102,908 illnesses, 2,637 hospitalizations, and 126 deaths.

Federal Oversight

Most of the nation's food supply is overseen by the Food and Drug Administration (FDA). The agency regulates all domestic and imported foods except meat, poultry, and eggs, which are overseen by the U.S. Department of Agriculture. A law passed in 2011 called the Food Safety Modernization Act gives the FDA the power to prevent foodborne illness rather than just respond to it. Among other things, the law:

  • Requires the FDA to mandate comprehensive controls across the food supply to prevent foodborne illness
  • Gives the FDA new authority to inspect food producers and processors
  • Gives the FDA the authority to compel a company to recall its products. Previously, the agency could only recommend a recall.
  • Allows the FDA to collaborate with other government agencies to help improve food safety

Food products may become contaminated while they are being manufactured, stored or delivered. Products are often recalled because they are (or may be) tainted with harmful bacteria or because they contain potential allergens such as milk or peanuts not mentioned on the label. A list of all food-related recalls that have occurred within the last 60 days is available on the FDA's website.

Effects of a Contamination Incident

A contamination incident can impact your business in a number of ways. First, your business will incur costs to destroy or dispose of the contaminated products. Your firm will also lose the value of the discarded products. 

Secondly, your business could be forced by circumstances or the FDA to withdraw the contaminated product from the marketplace. Recalling products you have already sold is time-consuming and expensive. Your business may also 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 thereafter.

Thirdly, a contamination incident can lead to third-party claims. Individuals who have been injured or become ill from a tainted product may sue your company for damages. You could also be sued by companies that have suffered a financial loss because they have used your contaminated product as an ingredient or component of another product. 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 reputation. Customers may shun your business for weeks or months after the incident whether or not they 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 it won't happen again.

Commercial Property Coverage

If food products cannot be used because they have been contaminated, will the damage be covered by your commercial property policy? The answer is maybe. For the loss to be covered, the food must qualify as insured property and the damage must result from a covered cause of loss at an insured location. Most businesses purchase commercial property policies that 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.

Virtually all property policies exclude damage caused by pollution or fungus (mold) or bacteria. Some policies exclude damage caused by contamination. However, the fungus, pollution, and contamination exclusions typically contain exceptions. Damage caused by these perils 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, your business income insurance may cover the loss. 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 by the Board of Health or another government agency to shut down due to the discovery (or suspicion) of food contamination, your company will lose income and incur extra expenses. These losses can be covered by adding the ISO Food Contamination endorsement to your property policy. 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

Covered expenses are subject to an annual aggregate limit. The endorsement does not cover government-imposed fines or penalties.

General Liability Coverage

If you are sued by customers for illnesses contracted from contaminated products, the claims should be covered by your company's general liability insurance. A general liability policy automatically covers product liability claims. The policy covers claims for bodily injury or property damage that occurs from your premises if the product is no longer in your physical possession.

If your business sells food 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 occur away from your premises to quality as a products-completed operations loss. The result is that claims for illnesses contracted from food eaten on your premises will be covered as products-completed operations losses, not premises-operations losses.

General liability policies contain some exclusions that may be relevant to an incident of food contamination. Virtually all policies exclude injury or damage that arises from pollution. They also exclude any cost or expense that results from a product recall. Some policies exclude mold.

Product Recall Endorsement

Although a general liability policy excludes costs associated with a product recall, some recall costs can be covered via an ISO endorsement called Limited Product Withdrawal Expense Coverage. The endorsement will reimburse you for certain expenses you have incurred if a product has been recalled due to a real or suspected defect or tampering. 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 claims by third-parties for expenses they have incurred to withdraw your contaminated product from the market. For example, suppose your company supplies wheat flour to a local bakery. You discover that a batch of flour you sold was contaminated with sawdust. 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.

Contaminated Products Insurance

The endorsements described above cover only some of the risks associated with contaminated food. Broader coverage is available under contaminated products policies. These policies are 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 aren't 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 it 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 may 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