Companies can suffer significant losses if allegations of food contamination lead to business interruption; for example, a plant may be closed during the course of a Food and Drug Administration investigation. Companies can also face long-term losses due to the damage caused to their reputations.
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Explore This IssueApril/May 2008
Insurance can be a valuable resource, ensuring that your company survives such losses. Indeed, according to one well-known food liability plaintiffs’ lawyer, over the past 10 years his clients have received at least $100 million from one insurance company alone. And, reportedly, in the case of the Jack in the Box lawsuits, approximately $100 million in settlements were made possible by insurance.
Types of Coverage
Long before a risk becomes a reality, companies should consider purchasing the following types of insurance, each of which may provide coverage for certain food-related losses, costs, and liabilities.
Comprehensive general liability (CGL) policies typically cover third-party claims for bodily injury or property damage arising during the policy period. In addition to paying the liability a company may incur through either a verdict or a settlement, CGL policies also typically require the insurer to defend lawsuits against the policy holder, such as those alleging foodborne illnesses. That “duty to defend” is broadly defined. Regardless of the merits of the claim, or whether the plaintiff is capable of winning its case, the insurer may be required to pay the costs of defending a tainted food claim. Given the substantial costs companies may incur in defending against food liability claims, it is probably worthwhile to purchase such insurance for the defense costs alone.
First-party property insurance provides coverage for losses arising from first-party property damage or, in other words, damage to a company’s own property. Depending on the terms of the policy and the type of damage, such insurance may cover the loss of contaminated food itself, although courts have reached different conclusions on the issue.
Some insurers offer specific loss policies, including those designed especially for the food industry. For example, restaurant policies can be purchased for all types of dining establishments. These policies allow the policyholder to select from a wide range of different types of coverage, including general liability, property, equipment breakdown, and spoilage.
Other insurers offer foodborne illness policies and trade name restoration policies. Such policies typically cover business losses arising from business interruption and damage to business reputation and are designed to provide assistance in reputation crisis management. Some cover only the specific foodborne illnesses listed in the policy, while others provide more comprehensive coverage.
In certain circumstances, coverage can be added to the types of policies discussed above in order to fill perceived or, arguably, potential gaps in coverage. For example, a company in the food industry may be interested in adding coverage for product recalls, which insurance companies often argue are excluded from coverage under CGL policies.
Another example of add-on coverage is business interruption insurance, which covers loss caused by a product line shutdown but often only applies where there is also physical damage to the property. Depending on the terms of the policy, this type of insurance may cover losses that arise from a management decision to shut down a certain product line because of contamination. If a processing facility suffers a fire that causes physical property damage and contamination, business interruption insurance will likely step in to cover the losses.
Directors and officers (D&O) liability insurance covers claims of alleged “wrongful acts” by company officers and directors, such as shareholder suits relating to incidents of wide-scale food contamination. Depending on the terms, a D&O policy may cover the costs of defending such claims, as well as the costs of paying settlements or adverse verdicts.
Need and Negotiations
When securing insurance coverage that will protect your company and its customers, there are several key things to remember. First, anticipate your company’s food liability risks and insurance needs. At the time of policy renewal, or at least annually, ensure that your risk management team and legal counsel meet to discuss anticipated risks, review the company’s past claims experience, and analyze developments in the industry. Once they have identified and prioritized the risks and considered worst-case scenarios, companies should coordinate with their insurance broker, risk manager, and insurance counsel to consider the entire range of available types of insurance coverage, including those discussed above, for losses arising from incidents of alleged contaminated food.