Key Takeaways:

• If facing liability or loss from an outbreak of foodborne illness, it is essential to maximize insurance
  coverage.
• Potentially responsive policy types include CGL, Contamination/Product Recall, Business Interruption
  in All-Risk Property policies, Products/Completed Operations Liability, and D&O Liability.
• Key steps include prompt and broad notice, comprehensive loss data collection, and steps to mitigate
  damage.

As anyone who reads the news (or simply loves a good chopped salad) is aware, the Cyclospora parasite has taken the United States by storm — sickening thousands with gastrointestinal disease, causing a massive recall of lettuce, impacting sales in restaurants, salad bars and supermarkets, and causing an influx of class action lawsuits (with more undoubtedly to come). Similarly, millions of eggs have now been recalled due to potential risk of salmonella. And as suppliers, distributors, retailers, restauranteurs, and other affected businesses work tirelessly to mitigate damages, busy risk managers are rifling through desk drawers and calling insurance brokers to ascertain whether mounting losses may be covered by insurance. While the event consumers have dubbed “Lettuce Gate” is still ongoing, it is never too early for business owners to identify potentially applicable insurance policies.

Contamination and Product Recall Insurance: This specialized coverage — typically first-party, although many forms also provide third-party recall liability — is designed to fill the gap left by general and product liability policies, which often exclude the policyholder’s cost of pulling product from the market. Product Recall Insurance typically responds to accidental contamination, impairment, or mislabeling of an insured product that has caused, or would cause, bodily injury. It may reimburse the direct and indirect costs of a recall, including: customer and public notification, product retrieval, shipping, testing, and destruction; the cost to replace or re-work the recalled product; lost gross profit and business-interruption losses tied to the recall; forensic accounting and crisis-management or public-relations consultants; and brand-rehabilitation costs.

Coverage may be subject to exclusions for pre-existing or known conditions and defects known before inception, for deliberate or knowing violations of law and failures to adhere to good manufacturing practices (poor quality control), and for loss of market share or goodwill. Where applicable, these exclusions may limit or eliminate coverage that would otherwise apply.

Moreover, contamination and product recall policies typically require an “accidental contamination” during manufacturing or processing of the policyholder’s product that renders the product capable of causing bodily injury, with government-mandated recalls and third-party recall liability covered only if specifically endorsed. For example, in Caudill Seed & Warehouse Co., Inc. v. Houston Cas. Co., 835 F. Supp. 2d 329 (W.D. Ky. 2011), involving a product recall claim by a manufacturer of peanut products that were contaminated with salmonella, the court ruled in favor of the insurance company and denied the policyholder’s recall claim because the FDA found that the contamination did not occur during the policyholder’s manufacturing of its peanut products, but rather, occurred earlier at the raw peanut supplier’s processing facility. Thus, the court ruled that contamination coverage under the policy was not triggered.

A policyholder can overcome such coverage hurdles by establishing that the contamination: (i) occurred during its manufacturing, processing, or distributing of the product; and (ii) was in fact accidental and unknown before the policy incepted, by pointing to compliance with its own quality-control and food-safety protocols to defeat a “poor quality control” defense. Additionally, policyholders facing a potential denial of a product recall claim should insist that any ambiguity in policy provisions be construed against the insurer that drafted it and in favor of coverage. Because Product Recall policies often carry sublimits, retentions, and waiting periods, the specific policy wording must be scrutinized closely.

Commercial General Liability Insurance: CGL insurance typically covers third-party claims alleging bodily injury or property damage caused by an “occurrence” during the policy period. Food manufacturers and food retailers likely carry products-completed operations liability coverage as part of their CGL policy. This coverage responds to claims of bodily injury, including illness, and property damage caused by products after they have left the manufacturer’s or retailer’s premises and entered the stream of commerce -- in other words, after they have been sold to consumers. In a foodborne-illness outbreak, the CGL policy is the coverage most likely to respond to consumer class action and individual injury suits, funding the policyholder’s defense as well as settlements or judgments up to the policy limit.

In Fireman’s Fund Insurance Co. v. Scottsdale Insurance Co., 968 F. Supp. 444 (E.D. Ark. 1997), the court found that multiple sales of allegedly virus-contaminated food served at a restaurant to several customers constituted a single occurrence under a standard CGL policy, applying the policy’s bodily injury and property damage coverage provisions. The court noted that all plaintiffs in the underlying actions alleged that they became sick after eating at the restaurant, and as such, the claims arose from one occurrence. Accordingly, the primary insurance company was required to pay only a single per occurrence policy limit (of $1 million) for all the bodily injury claims before the excess insurance company’s obligations under the excess policy were triggered. The number of occurrences that result from food-borne illness claims is often litigated under such policies because it impacts on the total available limits and the deductible or self-insured retention that a policyholder must satisfy to trigger the insurance company’s payment obligations.

In addition, insurance companies often rely upon CGL policy exclusions to deny food-borne injury claims. Standard CGL policies contain fungi or bacteria exclusions barring coverage for bodily injury caused by actual or alleged ingestion, inhalation, or exposure to bacteria. But fungi or bacteria exclusions may contain carve-outs for food-borne injuries, which exempt claims involving products intended for bodily consumption from the reach of the exclusion. In such cases, insurance companies may turn to pollution exclusions, which typically exclude coverage for damage caused by “contaminants.” Although such exclusions are typically meant to apply to environmental pollution, insurance companies may argue that pollution exclusions bar coverage for food-borne injuries because bacteria, parasites, and microbes in food allegedly constitute pollutants. Court decisions on this issue have been decidedly mixed, with courts closely examining the language of pollution exclusions, the definition of “pollutant,” and the circumstances leading to the outbreak. Notably, because the insurance company bears the burden of proving that a given exclusion applies, and because the duty to defend is broader than the duty to indemnify and is triggered by any potentially covered allegation, a policyholder is often entitled to a defense even while coverage is disputed.

Business Interruption Coverage in All-Risk Property Insurance Policies: Business interruption (or business income) coverage, usually part of an all-risk property policy, reimburses the net income a business would have earned had it remained open, along with continuing fixed expenses such as mortgage, rent, and lease payments and other extra expenses incurred to resume operations. Related extensions — contingent business interruption (losses caused by disruption of third-party servicers or suppliers), civil-authority, and ingress/egress coverage — may respond where a recall or governmental order disrupts the supply chain or access to the premises.

Standard coverage is triggered by “direct physical loss of or damage to” insured property caused by a covered peril. To satisfy the physical-loss trigger, a policyholder should marshal facts showing an actual physical alteration of covered property — contaminated produce or product physically infused with the contaminating agent. Policyholders should also check their all-risk policies for virus or bacteria exclusions and contamination exclusions, which insurance companies may argue limit or even preclude coverage under certain circumstances.

Directors and Officers (D&O) Liability Insurance: Directors and officers (or D&O) liability insurance responds to claims against directors, officers, and, under certain circumstances, the company itself for allegedly wrongful acts committed in the wake of a major recall and any resulting decline in share price. Such claims may include shareholder derivative suits, investor and securities claims, regulatory inquiries and/or government investigations.

The most consequential exclusion in this context is the bodily-injury/property-damage exclusion, which insurance companies invoke to channel the underlying injury claims to the CGL policy and which can become a coverage trap where a securities or derivative claim overlaps with injury allegations. A policyholder can overcome the bodily-injury exclusion by relying on a well-drafted carve-back that preserves coverage for securities and derivative claims (which should be negotiated into the policy at placement), and by arguing that the securities claim arises from the alleged mismanagement, disclosure failures, and stock-price drop, as opposed to actual bodily injury, so that the exclusion, narrowly construed, does not reach it.

The coverage a company may have for a product recall or food contamination incident will depend largely on the terms of its specific policy, including any exclusions, and the facts and circumstances surrounding your claim. Policyholders facing potential liability arising from a foodborne illness outbreak should take the following steps immediately:

1. Notify your insurance company promptly. Provide notice as soon as you become aware of a potential foodborne illness outbreak, contamination issue, or product recall. Early notice helps preserve coverage and ensures compliance with policy notice requirements.
2. Locate and inventory every potentially responsive policy. Do not stop at a single policy. Identify all lines of coverage that may respond—contamination and product recall, commercial general liability, all-risk property and business interruption, products/completed operations, directors and officers, and any umbrella or excess policies—and pull the policies for every year that may be triggered.
3. Gather and preserve relevant loss data. Collect all records and loss data related to the outbreak or recall.
4. Track and categorize all losses and costs. Segregate recall expenses, business-income losses, defense costs, and third-party claim payments so that each category can be matched to the coverage most likely to respond and documented for the claim.
5. Mitigate damages. Take reasonable steps to contain the outbreak, comply with regulatory requirements, and minimize further losses.
6. Review your policies for suit-limitation provisions. Calendar any contractual limitation periods—which are often shorter than the applicable statute of limitations—and comply with them, along with any notice and proof-of-loss deadlines, to avoid inadvertently forfeiting an otherwise valid claim.
7. Pursue upstream indemnity and additional-insured rights. Review supplier, vendor, and distribution contracts for indemnification obligations and additional-insured status that may provide access to another party’s insurance.