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30 November 2015Contaminated Product Insurance - Will It Provide The Cover You Are Expecting?

Contaminated Product Insurance - Will It Provide The Cover You Are Expecting?

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The UK Food Standards Agency (FSA) in its last published Annual Report (June 2014) of Food Incidents gave details of all the incidents of food and environmental contamination it investigated and managed in the UK in 2013.

A total of 1,562 incidents are included in the report, only four of which were classified as ‘high’ level. This figure is 42 less than in 2012, but the FSA says that it is higher than in many previous years.

These are encouraging figures given the time, expense and excellent work that the industry puts into managing food safety but how  does the food industry as a whole view the risks of product recall and contamination?

The Capturing Recall Costs and Recovering Losses Report produced by Ernst and Young for the Grocery Manufacturers of America  found that;

  • 81% respondents deem financial risk from recalls as significant to catastrophic
  • 58% have been affected by a product recall event in the last five years
  • 78% manage the risk by procuring insurance
  • 77% experienced recalls that had a financial impact of less than$30 million
  • The largest recall costs came from business interruption and product disposal
  • The highest recoveries came from insurance proceeds

78% of firms are looking to the insurance market to provide balance sheet protection with CPI seen as an integral part of coverage for food and drink companies, but will the cover respond in the way they expect when they need?

A number of judicial decisions in the US have upheld disclaimers of coverage by insurers due to the failure of the claim in issue to meet the definition of “accidental product contamination”. The decision in Wornick Co. vs Houston Casualty Co illustrated the reasoning reflected by these decisions.

In that case, a federal district court held that a recall of dairy shake packets for suspected contaminated from the dairy component of the shake did not constitute “contamination. The insured supplied military rations to the U.S. government. When salmonella was discovered in one of the lots of dairy shake packets, it was traced to manufacturing equipment at the facilities of the company supplying an entity that supplied another company that provided the insured with the instant dried milk used in packets.

After the government issued a “Do Not Consume” order and demanded that the insured remove and replace the packets from the meals ready to eat (MREs), the insured recalled 700,000 cases of MREs and replaced the packets. It was ultimately determined that no contaminated product had been sent to the insured.

The court concluded that the insured did not demonstrate “contamination” or “impairment” but denied both parties’ motions for summary of judgment due to material issues of fact as to whether the MREs satisfied a “fault in design specification or performance” under the policy. In determining whether the contamination portion of the policy provided coverage, the court first analysed multiple dictionary definitions and concluded that “contamination” required actual contact with a substance that would render it impure.

It explained that “the term ‘contamination’ requires that the insured’s product be soiled, stained, corrupted, infected, or otherwise made impure by contact or mixture” with the subject contaminant. Second, the court reasoned that the product must carry a risk of illness to fulfil the “resulted, or may likely result in . . . physical symptoms of bodily injury, sickness or disease or death” element. As there was no evidence that any of the insured’s products came into contact with salmonella, the court found no “contamination.”

Ruiz Food Products, Inc. vs Catlin Underwriting United States, Inc., involved a recall of a product based on presumed contamination from salmonella that was not actually present. The insured produced “ready to eat” burritos called Tornados; one of the ingredients was a spice mix made by a supplier who obtained hydrolysed vegetable protein (HVP) for the spice mix from another supplier.

When the HVP supplier’s equipment tested positive for salmonella, it issued a recall of its HVP. Although tests proved no HVP infected with salmonella reached the burrito manufacturer, the Food Safety Investigation Services insisted that the Tornados be recalled.

The federal district court first found that a recall based on a mistaken belief that a product is contaminated does not qualify as  “contamination” under an accidental product contamination policy. To substantiate a finding of contamination under the Policy, objectively verifiable evidence that a product was actually contaminated is required. The court then analysed the requirements for coverage on the basis of “impairment.”

It held that “impairment must be to the product itself, and not as a result of the collateral circumstances surrounding the product. The court applied the Black’s Law Dictionary definition of “impairment” and adopted the reasoning of Little Lady Foods to conclude that the absence of salmonella in the burritos meant that “there was no defect, flaw, or impairment.

In Fresh Express .v. Beazley, September 2006, a particularly virulent strain of E. coli appeared, the source of which was determined to be bagged spinach. At the time of the outbreak, Fresh Express was the largest bagged spinach producer; it purchased all of its produce, and did not own farms.

On September 14, the FDA contacted Fresh Express and  “recommended that they take steps to recall.” That same day, the FDA issued a “no consumption advisory” for bagged spinach. Within 24 hours, bagged spinach had disappeared from food store shelves. A few hours later, Fresh Express decided to halt “harvesting, processing, and distributing spinach products.”

Fresh Express did not issue a product recall because, as a result of the FDA advisory, food retailers had already removed all bagged spinach from their stores, and consumers were advised not to eat spinach. Although it was ultimately determined that Fresh Express products were not the source of the E. coli outbreak, Fresh Express suffered a significant loss of business in the wake of the FDA advisory.

Fresh Express made a claim under its Total Recall+-Brand Protection policy. At that time, the FDA was still investigating whether Fresh Express was linked to the outbreak. Fresh Express’s recall policy was identified as “Malicious Contamination, Accidental Contamination and Products Extortion Insurance.” The policy’s aggregate limit was $12,000,000, and only the “Accidental Contamination” was at issue in the coverage litigation.

The coverage dispute focused primarily on the defined terms “Insured Event” and “Accidental Contamination.” On appeal, Beazley contended that “Insured Event” was equated with “Accidental Contamination,” and “Accidental Contamination” was narrowly defined to refer to actual or potential contamination by an “error” committed by Fresh Express.

Since the “E. coli outbreak” was not attributable to any error by Fresh Express, the “outbreak” could not qualify as an “Insured Event” under the policy. Fresh Express argued that the “Insured Event” that triggered coverage was not its error, but rather the E. coli outbreak. The trial court had agreed, and found that Fresh Express could recover its losses under the policy because its errors — which included violating its own internal policy by purchasing food from a wholesaler within a certain distance of a cattle feedlot and purchasing spinach without conducting a good faith food safety audit — constituted reasonable cause for Fresh Express to believe that its products were the source of contamination and prevented it from seeking a full exemption from the FDA’s advisory.

The appellate court found the trial court’s decision to be “entirely inconsistent” with the plain language of the policy. On appeal, the insurers argued that the trial court’s $12 million judgment should be overturned because the E. coli outbreak was not attributable to an error by Fresh Express, while Fresh Express contended that the policy only required it to prove that its errors were sufficiently serious to link it to the outbreak. 

The California Court of Appeals upheld the denial of coverage as follows: “While ‘the E. coli outbreak’ itself may have given Fresh Express cause to believe that its products were contaminated, ‘the E. coli outbreak’ was not an ‘[e]rror by [Fresh Express]’ so it could not qualify as ‘accidental contamination’ and thereby [is not covered as] an ‘Insured Event’ under the policy.” The court also found that “neither the E. coli outbreak nor the FDA’s advisory arose from Fresh Express’s errors. The sole cause of the E. coli outbreak and the FDA advisory was [a competitor’s] contaminated spinach, not any errors by Fresh Express.”

These cases reinforce the need to ensure that the policy wordings are reviewed in detail and that the cover reflects as far as is possible the policyholder’s expectations and that they have a clear understanding of how the policy will respond in the event of a claim.

The English courts have yet to rule on the scope of CPI, however, similar issues are likely to arise. Case law focusing on product liability such as Bacardi-Martini Beverages Ltd vs Thomas Hardy Packaging Ltd and Omega Proteins Ltd vs Aspen Insurance UK Ltd underline the need for clarity in this area. Issues can arise with contaminants posing no risk to health but which still trigger a recall.

Bacardi, a non-insurance case, found that admixture did not involve “damage” of one ingredient by another. However, Omega proceeded on the basis that meat unfit for human consumption contaminating the bulk of good meat did amount to damage.

Caution is needed since significant losses for destroyed product which is commercially unsaleable but “safe” may not be covered under standard Pl cover, if there is no damage, or under CPI, where there is no risk of injury or property damage.

A specialist Broker such as Arthur J. Gallagher with a comprehensive knowledge of the London market and policy wordings can help to ensure that coverage is designed to protect them from the impact of product recall and contamination incidents.

Our team is experienced and well known in the London market with a track record of developing innovative solutions that continually extend the boundaries of coverage provided.

Download the Contaminated Product Insurance.pdf

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