The food industry is in the midst of a surge of product recalls, including this year alone the recall of apples and apple products, kale and kale products, smoked salmon, soybean sprouts, spinach and spinach products, hummus, ice cream, frozen yogurt, sherbet and various frozen vegetables. This surge has been steadily rising since passage of the Food Safety Modernization Act (FSMA) and is likely to continue in the coming years due to increased product monitoring, testing and recordkeeping requirements. And this trend is not limited to the food industry, as the U.S. Food and Drug Administration (FDA) continues to exercise jurisdiction over the medical device, pharmaceutical and cosmetics industries. Passage of the Consumer Product Safety Improvement Act has also spawned an increase in the recall of consumer products in recent years.
Given the increasing frequency, size and cost of recalls, many companies that operate in these industries may find themselves turning to their product recall insurance policies for coverage. Such policies cover a company’s own expenses associated with a recall, including crisis response and brand rehabilitation expenses, as well as lost profits. They may also cover a company’s liability for the recall-related expenses and lost profits of third parties, such as retailers. Thus, when responding to a recall, it is important to keep insurance in mind and to take the steps necessary to make sure that your product recall insurance—and any other potentially available insurance—provides the expected coverage.
With any recall, it is most important to work quickly to investigate and identify the source of the problem and take corrective actions to ensure that it will not occur again in the future. Exactly which products were affected must be ascertained, and the company should work with the FDA and/or other regulatory agencies to conduct an effective recall.
As part of this process, public perception must be managed as best as possible. This is one area where a product recall policy may first come into play, as recall policies typically provide valuable crisis response resources. Keep in mind, however, that these policies often identify specific crisis management or public relations firms that may be used in the event of a recall. If your company wishes to use another firm, prior approval should be obtained to avoid the risk of the insurer objecting to these important and otherwise covered expenses. An infrastructure may also need to be put in place quickly to respond to a large number of consumer inquires, and product recall insurance should cover these costs as well.
To access this coverage, notice must be provided under the policy, which may mean providing notice even before the recall is issued. Indeed, some recall polices require that notice be provided as soon as the policyholder first becomes aware of a potential loss, while others require that notice be provided within a few days after a covered event. A “covered event” may not be limited to an actual recall, but may include instances where adverse publicity implies an accidental or malicious contamination of the company’s product. Although the company might worry that providing notice “too early” could needlessly attract attention to what ultimately proves to be a small issue, insurers are notorious for strictly construing notice provisions, so it is better to provide early notice to avoid any dispute with your insurer. Should the company have an excess recall policy, notice should also be provided under that policy.
The notice obligation is equally applicable to other types of insurance that may respond to claims spawned by a product recall. To that end, notice should be provided to any other potentially triggered insurance, including the company’s general liability policy, which will most likely be responsible for third-party bodily injury and property damage claims that recall policies often exclude. For example, claims from consumers alleging bodily injury from ingesting the recalled product or, in the case of suppliers, claims from purchasers who have incorporated or repackaged your product into their product. Directors and officers (D&O) coverage may also respond in the event of shareholder or investor suits stemming from a recall.
In addition to the notice obligation, there are other time-sensitive policy provisions that cannot be ignored. These include the computation or proof of loss and suit against the insurer provisions, both of which require policyholders to take certain steps within defined periods of time in order to maintain certain rights under the policy. These provisions must be noted and calendared immediately to ensure that, as the company focuses on seemingly more pressing issues arising from the recall, these provisions are not forgotten.
Having provided notice, the company should be careful to document all recall-related losses. That may not be too difficult with regard to certain expenses, such as the cost of pulling product from shelves, rental charges for additional storage space, and wages for additional employees and overtime. But other aspects of the loss are inherently more difficult to quantify and prove for coverage, such as lost profits and brand rehabilitation expenses. The company should consider retaining an expert who has successfully quantified and presented losses under recall policies before, and their retention should be through insurance counsel to protect the privilege in the event of third-party claims.
The company also needs to keep test results that show evidence of contamination or any other problem with the product and retain at least some of the affected product. This is especially important in the context of a food recall because some courts have interpreted recall policies to require an actual contamination of the product, and insurers have insisted that actual contamination be proven. Therefore, the company should have samples of the product on hand in the event the insurer wants to personally test the product.
Although the company and FDA may want the product destroyed, the company’s insurers, including any general liability insurers defending against third-party claims, should be consulted before destroying the last of the product. If the policy contains adverse publicity coverage, however, there may be no need to retain product as the policy may be triggered without any actual contamination if the product was the subject of media coverage or a governmental publication specifically naming the company and the product. Such coverage may be subject to a sub-limit, however, so the policy’s limits of liability require careful review.
Given the complexities of product recall insurance and the unique exclusions found in such policies, a policyholder would be wise to retain insurance counsel to assist in presenting a claim to the insurer. Insurers will often ask for unfettered access, which may include intrusive site visits, employee interviews and seemingly never-ending requests for further detail about the claim—all in an effort to build a case to deny coverage. Insurance counsel can assist in managing the information flow to protect coverage, and know when to take “no” for an answer from the insurer.
Retaining counsel can also help protect the privilege, to the extent possible, during a time when the company may be facing numerous third-party liability claims, and counsel should be able to assist in convincing the company’s general liability insurer to implement a defense strategy designed to protect the company’s reputation during these trying times rather than just the insurer’s bottom line.
Accordingly, with a little careful planning and seasoned consultation, the benefits of product recall coverage can provide real relief during a very difficult time.