The article discusses coverage under recall and commercial general liability insurance policies and emerging case law on recall and contamination policies. The full text is available to subscribers at www.law360.com.
Food product recalls, whether the result of misbranding, adulteration or another source, are showing no signs of slowing down. According to ExpertRECALL Index, the fourth quarter of 2013 saw a 91 percent increase in the number of pounds of USDA-regulated food recalled as compared to first quarter 2013, despite a decrease in the overall number of recalls. The FDA also has the authority to mandate food product recalls under the Food Safety Modernization Act, as well as the authority to request that a manufacturer or distributor voluntarily recall a product. In practice, companies have little practical choice but to comply with such “voluntary” recall requests where a product may be contaminated or mislabeled or may otherwise pose an actual or perceived risk. And, of course, the costs — both direct and indirect — associated with such recalls can be substantial. These costs include the immediate expenses associated with recalling and destroying the recalled product as well as lost profits, reputational harm and potential liability to third parties arising from the recall.
Aside from coverage for third-party bodily injury claims, standard commercial general liability (CGL) policies often provide little or no coverage for many costs associated with a product recall. Even when coverage for these third-party bodily injury claims appears clear to an insured, a carrier may seize upon a lot or batch endorsement (see, e.g., ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.2d 62 (Del. 2011)) or a pollution exclusion (see, e.g., PBM Nutritionals, LLC v. Lexington Ins. Co., 723 S.E.2d 707 (Va. 2012)) in an attempt to deny coverage. But more fundamentally, many of these policies specifically exclude costs associated with a recall, although some CGL policies carry endorsements that provide limited recall coverage.
In most cases, product recall insurance, whether in a stand-alone policy or as part of a contamination policy, will provide more substantial coverage for the costs associated with a recall. See, e.g., Hot Stuff Foods, LLC v. Houston Cas. Co., 2012 WL 2675225 (D. S.D. July 5, 2012). Product recall coverage offers “first-party” coverage for the costs incurred by the manufacturer or distributor for recalling, removing and disposing of a recalled product; expenses for communicating the recall; lost sales revenue attributable to the recall event; adverse publicity in the news media or government publications concerning the recall; expenses incurred to rehabilitate the reputation of the company/product affected by the recall; and legal costs incurred in responding to claims arising from the recall. They may also include “third-party” coverage for lost profits of downstream business partners resulting from the recall, for which the policyholder may be liable.
Companies in the food and beverage industry that may face a recall should carefully analyze their current insurance coverage to determine whether they have sufficient protection for the risks and expenses of a product recall. Among other things, companies should consider whether they are covered for both first- and third-party risks and whether their policies will respond to both voluntary and mandatory recalls.
McGuireWoods’ food and beverage and insurance recovery lawyers can assist companies in evaluating the risks they may face from product recalls as well as the scope of coverage offered under the company’s policies. An experienced broker can identify the insurers that offer the product most suited to your company’s needs and help negotiate favorable terms and price. Working together, a team including your broker and outside counsel can ensure that you purchase the right coverage with appropriate terms and conditions.