States also have varying and evolving law that could limit the enforceability of indemnities or negate related insurance procurement requirements in supplier contracts. Companies must review the language of the indemnity they give and receive, thoroughly analyzing whether these, or other, provisions would be affected by the laws that are most likely to apply.
Companies also should be prepared to look to their own insurance portfolios if the indemnities or additional-insured provisions of the supplier’s policies fail. In assessing the types and amount of coverage they have, companies should not overlook the specific language of their insurance policies to ensure their coverage provides the protection they expect.
No insurance portfolio perfectly covers all of the risks companies might identify. Where a company identifies a potential coverage gap, the company must consider the costs and benefits of filling those gaps. It is not always desirable, or even possible, to fill in every gap or limitation in coverage. But it is important for companies to be aware of the limitations in their coverage so their risk management decisions are made consciously and not from ignorance or accident.
For example, although most food companies maintain commercial general liability policies that often cover the costs and liabilities arising from third-party bodily injury or property damage claims, those policies generally contain exclusions that bar coverage for some claims and costs associated with a product recall. After analyzing their recall risks—including potential third-party claims by companies further up the supply chain for their own recall costs—companies should determine if their coverage is sufficient.
Companies can assess the sufficiency of coverage using industry benchmarks, as well as considering the extent of protection needed to advance the company’s business goals in the face of a recall or contamination incident. This assessment might include a potential recall’s likely impact on a company’s brand reputation, finances, and ability to preserve its relationships throughout the supply chain.
Thus, assessing the sufficiency of the amount and types of insurance that a company has ultimately should turn on strategic business judgments about the company’s willingness to accept risk and the costs and benefits of taking steps through insurance or other contractual means to spread that risk. In that light, many companies may find specialty contamination and recall policies to be useful additions to a risk mitigation portfolio, but others may decide the risk associated with a recall does not justify the expense of obtaining a recall policy, particularly where the company has concerns about the breadth and cost of the recall coverage provided.
3. Understand the Legal Coverage Positions Insurers May Take to Limit Coverage
In evaluating the extent and types of coverage to maintain, food companies’ cost-benefit analyses need to consider the likelihood and strength of arguments that insurers might assert to avoid or narrow coverage once a claim arises.
Initially, evaluating a company’s coverage portfolio entails a review of the policy’s language. However, companies should not restrict their analysis only to the language used in a specific policy form. Rather, a company must evaluate that language in light of the legal trends and coverage positions that insurers recently have taken.
For instance, the language of product contamination and recall policies varies substantially regarding what event triggers the insurers’ coverage obligations. One of the key triggers companies often seek is an “accidental contamination” of their products requires a recall to avoid causing foodborne illnesses to consumers. Virtually all modern recall policies applicable to food companies contain an accidental contamination trigger, but recent cases show insurers and their policyholders sometimes disagree as to what exactly ought to happen for those policies to respond.