Recalls Driving Your Company Nuts? Insurance May Help Those Affected by Food Contamination Claims
April 6, 2009
The Food & Drug Administration ("FDA") just announced a recall of at least 1 million pounds of pistachios, due to concerns about Salmonella contamination. Several strains of the bacteria were recently detected on products distributed by California-based Setton Pistachio of Terra Bella, Inc. The pistachio recall comes on the heels of the recent Salmonella outbreak that was traced back to peanut products distributed by Peanut Corporation of America, and which led to one of the largest recalls in U.S. history. In that outbreak, more than 600 people were sickened and nine died. As a result, thousands of products were recalled. While the pistachio recall is unrelated to the recent peanut contamination, and is alleged to have caused only a handful of illnesses, the list of recalled products has the potential to expand exponentially in a similar manner because the pistachios were distributed to food wholesalers who then repackaged them or incorporated them into products for resale. For Setton Pistachio and the other companies to which its products were distributed, great risk and large costs, including tort litigation, government investigations, and recall activities, potentially lie ahead.

If your company is or becomes involved in the pistachio or peanut recalls, or any other food product recall for that matter, look to insurance to minimize those and other costs associated with food contamination.

Food Poisoning Lawsuits and Comprehensive General Liability Insurance

In the event your company is sued by plaintiffs alleging that they were sickened by your food product, Commercial General Liability ("CGL") insurance policies will typically cover your defense costs as well as amounts you are found liable to pay in damages. Given the substantial costs a company can incur in defending a single lawsuit, it is worthwhile to seek coverage under your CGL policies for the defense costs alone, especially where food liability could lead to multiple suits or even class actions.

You should be aware, however, that CGL insurance typically excludes coverage for losses stemming from recalls themselves, although such coverage is often available elsewhere, as described below. In addition, insurers will typically raise numerous defenses to coverage, including assertions that the "pollution" or "expected and intended" exclusions apply. But, you should not accept someone's assertion that there is no coverage without testing the assertion. In many instances, coverage is available, although insurers may resist paying for it.

Governmental Investigations and Directors' & Officers' Insurance

If your company is alleged to have engaged in wrongdoing related to food product contamination or a food product recall, it may face governmental investigations and key management personnel may be called to testify before Congress. The costs of providing testimony, allowing government access to your premises for inspection and testing, or handing over company documents can add up quickly. Those costs may be covered by Directors' and Officers' ("D&O") insurance. D&O insurance provides defense and indemnity of claims made against company officers and directors arising from acts committed in the officers' and directors' official capacities, including criminal charges and shareholder suits. It also reimburses a company for amounts it pays to indemnify its officers and directors.

Product Recalls and Product Recall Insurance

Whether or not your company is named in a lawsuit or required to comply with government's requests for information, your company may find it necessary to issue a recall. Product Recall insurance can be purchased separately or sometimes added to another policy, such as a CGL policy, to fill the gap where such claims are excluded by the standard policy. Product recall coverage is intended to cover a company for its own financial loss suffered as a result of a recall, such as the cost of physically removing the product from retailer shelves, testing, storing, or disposing of the product, and in some instances, the cost of rebuilding the company's reputation following a recall.

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Even if your company has no connection to pistachios or peanuts, these significant recalls serve as a strong reminder that it is important to periodically review your insurance portfolio. With the assistance of risk managers and legal counsel, you should consider all the possible risks your company could face. Then review your insurance policies. If you determine that your company is uninsured or underinsured for certain of those risks, consider purchasing supplemental coverage to fill the gaps.

If you would like further information, have questions regarding your insurance coverage, or want more information on our insurance recovery practice capabilities, please contact Kelley Drye's Insurance Recovery Practice Group.