Protecting against food-borne exposures

Loss of income, plus liability, recall, & reputation restoration costs can cripple a business

By Dave Willis

Last summer, cantaloupe produced on a Colorado farm led to the deadliest outbreak of a food-borne disease the Centers for Disease Control has identified in more than a decade. The most deadly outbreak since the CDC started tracking them in 1970 involved the same disease, listeriosis, and was traced to a Mexican-style soft cheese.

Nearly every day, reports surface about salmonella, norovirus, E. coli or other food-borne illness outbreaks. Often, food producers or processors are the cause. Sometimes, restaurants are involved. The worst hepatitis A outbreak in U.S. history occurred when more than 650 people were infected and four died after eating green onions served at a single Chi-Chi's location. The event helped lead to the chain's demise in the United States.

According to Eric MacDougall, president of MRM Group, food-borne illness continues to be a growing concern. "There is a definite trend toward increased regulation from the governmental agencies," he explains. "For example, enactment of the FSMA—Food Safety Modernization Act—last year expanded the role of the FDA, most notably granting them mandatory recall authority."

In addition, he says, the USDA has expanded and increased the variety of bacterial pathogens they now require food processors to test for, and the CDC seems to be more involved with illness outbreaks in an effort to trace the illness back to the source, generally the food processor.

According to Crystal Jacobs, food-borne illness program underwriter at Professional Liability Insurance Services, other government intervention has played a role. "Heightened identification and recognition of food-borne illness resulted from a post-9/11 increase in funding to laboratories to help them identify norovirus and other pathogens as part of the food defense programs," she says. "Previously, only three labs across the country could identify norovirus. Now, many more can."

In addition, she says, the FDA's 2005 Food Code added norovirus as a leading food-borne illness pathogen. It is now part of the "Big 5," a group of highly infectious pathogens that also includes salmonella, E. coli, shigella and hepatitis A virus.

"These two issues converged and drastically increased the identifiable pathogens related to food," explains Lisa Neal, food-borne illness program underwriter at Professional Liability Insurance Services. "This has led to greater discussion of food-borne illnesses—something that will most likely continue to increase, given that attorneys and their clients will be able to link an identifiable food-borne illness to a company, such as a restaurant, quicker and easier than ever."

At risk

According to Gundi Hofmann-Abell, national account executive at Restaurant Programs of America, eating establishments are particularly vulnerable, because they deal with perishable food products. The issue is of such significance that her firm highly recommends protection for every client. "We're seeing more and more restaurants take this advice," she explains. "There's definitely an increase in the number of establishments making food-borne illness/trade name restoration coverage part of their insurance program."

Meat, dairy and produce processors also are high on the list of exposed businesses, adds MacDougall. "Actually, any business that produces or handles edible products is at risk. This includes food and beverage processors, ingredient and food product component suppliers and manufacturers, distributors, co-packers, re-packagers, restaurants, package and container manufacturers, pet food and feed industries, and the list goes on."

Adds Rebecca Garcia, vice president at Professional Liability Insurance Services, "Any facility that is or should be inspected by a health department has a food-borne illness exposure." Typically, these are food service operations including, but not limited to, restaurants, hotels, resorts, bowling alleys, caterers, food manufacturers, etc. In addition to biological food contamination exposures, these businesses also have physical (metal, glass) and chemical (lubricants, detergents) contamination exposures, she explains.

"The media can have a devastating effect on these businesses, whether an event is caused by actual or alleged malicious or accidental actions," she notes. "We can cite many examples where the public's reaction is swift and decisive, with immediate impact on the company's revenue stream."

According to Hofmann-Abell, insurance offers protection in a couple of ways. "First, suits from customers sickened by ingesting contaminated food can be handled by the products liability coverage, which often is part of a general liability policy," she notes. "For example, if salmonella caused customer illness at a restaurant, medical bills and suits for pain and suffering incurred by those affected would be covered, up to policy limits."

Trade name restoration is another coverage, Jacobs says. "This coverage form can minimize the impact to an affected location by providing revenue replacement and extra expenses associated with actual or alleged food-borne illness." The coverage can also address, up to policy limits, the business income loss sustained by other restaurants with the same name, adds Hofmann-Abell. "This is important because publicity about an occurrence can negatively affect other restaurants with the same trade name," she says.

Product contamination policies, usually referred to as product recall insurance, provide another line of defense, according to MacDougall. "These policies typically cover recall expenses, including the value of the product, rehabilitation expenses, customer and third-party recall expenses, loss of gross income, customer loss of profits, services of public relations firms and crisis management consultants," he says.

Neal points out the importance of understanding what's covered—and what's not—in any policy. "Standard commercial property policies, those that cover time element or business interruption, don't address these (food-borne illness) exposures for a couple of reasons," she says. "First, there's no physical damage that causes a revenue drop, like in the case of a fire. Second, if food-borne illness/food contamination is not a named peril, no trigger exists under these policies."

Agent advice

According to Hofmann-Abell, agents and brokers can play an important role in helping businesses protect themselves. "A broker should be reviewing clients' policies and providing them a free coverage analysis," she says. "Include suggestions about any coverage gaps. The broker can help make sure clients are aware of exposures and that they are made whole, to the extent possible, if a loss occurs."

Her firm also works with clients to set up safety committees and conduct monthly risk management meetings so they can focus attention on safety on a regular basis.

"Evaluate various available products," advises Garcia. "With restaurant clients, agents and brokers should look for products that include a trade name trigger, especially if the client operates a restaurant with a commonly known trade name."

In addition, she says, "Negotiate crisis management services as part of the insurance product. When evaluating a particular product, agents and brokers should encourage clients to 'test' the knowledge and experience of the crisis management teams, as well as the claims adjusters, prior to purchasing."

Garcia also says agents should encourage clients to re-evaluate their food handling procedures. "Have them look at incoming products," she explains, "and work with a risk management/crisis management team that can help them effectively mitigate or minimize food-borne illness issues."

She warns producers to be wary of "food service" endorsements. "These may provide limited coverage but typically don't provide trade name triggers," she explains. "Plus, they may require the restaurant to close for the policy to be activated, and they typically don't include crisis management services." Some endorsements may tout to trigger for food contamination when they actually respond only to food spoilage arising from power outages. "Read forms, ask questions and talk directly to your underwriter," she adds.

In addition to putting proper coverage and crisis management resources in place, MacDougall says agents and brokers should ensure that recall manuals exist and are up to date. "It's also a good idea to have clients perform a mock recall annually," he says, "and clients also should obtain third-party food safety audits."

Experts also warn agents and brokers to avoid what they see as common mistakes. "Too often, we see a general lack of awareness about the potential economic loss a restaurant client can suffer from this type of occurrence, especially if it is part of a chain or franchisee group," explains Hofmann-Abell. "If the agent or broker is unaware, they don't make the client aware, which means the client doesn't know insurance exists to cover it and no protection is in place."

Too often, agents and brokers believe the ISO endorsement is adequate coverage, says MacDougall. "Basically, it's an extra expense only form. They assume the exposure is limited to recall costs, and they overlook the loss of revenue or sales component of a claim."

He's also seen confusion regarding the coverage trigger. "Although it is commonly referred to as product recall insurance, the actual trigger is a contamination, food-borne illness, mislabeling, misblending, malicious tampering or extortion event that has the potential to cause bodily injury or property damage," MacDougall explains. He points out that the second most common cause of a recall is mislabeling—for instance, failing to list an allergen on the label. "These events are covered by the policies, as well."

Jacobs explains that, for liability issues associated with food-borne illnesses, general liability policies typically respond. "However if your client is a food service entity, make sure that the 'exclusion of pathogenic or poisonous biological or chemical materials' is removed," she says. "This exclusion could potentially create coverage issues. When it was added because of mold issues, the insurance industry did not separately look at the food service industry to determine unintended consequences."

Knowledge base

Agents and brokers can learn more about food-borne illnesses and how to address exposures with a few mouse clicks or a phone call or two. "Many online resources exist," says Hofmann-Abell. "In addition, carriers offer educational Webinars on the topics. Agents and brokers should go to the carrier and educate themselves as much as possible."

Professional Liability Insurance Services offers Webinars and on-site presentations, some of which qualify for CE credit. "These presentations educate agents on the exposures of food service entities, explain the differences in recall coverage versus trade name restoration coverage and provide agents with sales tools and resources for their use with clients," says Jacobs.

MacDougall suggests that agents and brokers visit his firm's Recall Advantage Web site, USDA and FDA sites and food industry Web sites, and sign up for food safety newsletters. He says food safety consultants, food industry association staff and others can help clients address safety issues and manage potential risks up front.

Be aware that crisis management services are available with certain insurance products, counsels Neal. "These services can be a big help for clients if a catastrophic event occurs, but they also can be a resource throughout the year to help clients reduce potential risks." Such services are scalable, depending on client wants and needs.

Hofmann-Abell says it's important for brokers to offer and recommend the coverage for any client with a potential risk. "As with any such recommendation, we put it in writing, and if the restaurant does not want the coverage, its rejection should be confirmed in writing," she says. "We make sure we offer and explain it to every restaurant account we write or quote."

Be diligent—and be ready for pushback. "Educate your client base on technical details of food-borne illness and product contamination," says Garcia. "Many in the food industry don't believe this could happen to them as they manage their daily lives with devotion and dedication to good practices. They never believe customers—their friends—would stop coming or stop buying, based on their history in the community." 

The author

Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.