November 02, 2015 Articles

Insurance for Food Contamination and Recall Events

Businesses in the food industry can make use of food contamination policies to ensure they are adequately protected from a food contamination and recall loss but should exercise caution when purchasing a specialized food contamination policy and scrutinize policy language to ensure adequate coverage

by Brian J. Osias and Michael Collins Smith

American businesses face increased exposure to liability for food contamination and recall events. In 2010, Congress passed the Food Safety and Modernization Act (FSMA), “aim[ing] to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it.”[2] When enacted in 2011, the FSMA granted for the first time the Food and Drug Administration (FDA) enforcement power over its recall actions. Under the FSMA, the FDA no longer must seek an injunction to compel a manufacturer to recall a product. The FDA is now empowered to issue mandatory recalls enforced by strict monetary sanctions. Although the FDA does not issue aggregate data on the number of recalls issued pre- and post-enactment of the FSMA (and data on the number of units recalled would be more informative in any event), even a quick look at the FDA’s website demonstrates the volume of recall actions—over 230 in the first six months of 2015.[3] Some recalls are enormous. In 2014, for example, Kraft recalled 1.2 million cases of cottage cheese due to the potential for illness.[4]

As a result of the FSMA and the current regulatory climate, businesses in all phases of food production, preparation, distribution, and sale face the constant threat of a potentially debilitating recall event. Such businesses have sought to insure themselves against recall losses and, when faced with liability, have sought coverage under their policies. Insurers, however, have often denied coverage for recall losses under both comprehensive general liability (CGL) policies and first-party property insurance policies, and courts have in many, perhaps most, instances upheld those determinations. A number of insurers, consequently, began offering specialized food contamination policies, which purportedly provide expanded coverage for recall events. This article examines potential impediments to coverage for food recall events under CGL and property policies and the typical structure and coverage provided by specialized policies, and explains the importance for policyholders of carefully scrutinizing policy language at the time of purchase and sale under the specialized policies because even subtle language distinctions may prove significant.

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