Insurance Coverage for Food Contamination and Recall...

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Presenting a live 90-minute webinar with interactive Q&A

Insurance Coverage for Food Contamination

and Recall Claims under CGL, Property

and Contamination Policies Navigating Scope of Coverage, Coverage Triggers, Relevant Exclusions and Policy Language Interpretation

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 29, 2016

Robert D. Chesler, Shareholder, Anderson Kill, Newark, N.J.

Joann M. Lytle, Partner, McCarter & English, Philadelphia

Edward Rhone, Principal, Claims Manager, Parker Smith & Feek, Bellevue, Wash.

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Insurance Coverage for Food Contamination and Recall Claims

under CGL, Property and Contamination Policies

Edward Rhone

• There can be overlapping coverage between

CGL, Property, Stock Throughput and

Products Recall & Accidental Contamination.

• Each has specific triggers to consider.

• Each has “other insurance” language.

• Review of policy features to utilize.

6

Practical Use of Policies

© 2016 Parker, Smith & Feek. All Rights Reserved.

• Based on facts of the event, each policy

should be reviewed for possible coverage

grants.

• Each should be evaluated for the least

impact to the policyholder – ie. Deductible,

Policy Limits for Protection, Broadest

coverage based on the facts of the event,

Other insurance provisions.

© 2016 Parker, Smith & Feek. All Rights Reserved. 7

Overlapping Coverage

• Coverage could include stock.

• Usually coverage is from an external cause.

• As previously discussed, pollution exclusion

likely.

• First party only.


Property Coverage

• CGL may provide coverage for damage to a

3rd party in which the insured’s product is

incorporated – if it causes damage (property

damage and loss of use)

• Possible coverage for injury to 3rd parties.

• Check exclusions – specifically pollution

exclusion.

• Will not provide coverage for recall of the

insured’s product or work.


Commercial General Liability

• The Marine Stock Throughput Insurance

Program is an all-inclusive Policy covering

goods from the time an Assured assumes an

interest in the goods until their interest

ceases.


Cargo or STP

• “This insurance hereunder attaches from the time the

subject matter becomes at the Assured’s risk or the

Assured assumes interest and continues while the subject

matter is in Transit and / or in Store, on Exhibition or

elsewhere, including while held as Stock and / or at the

Assured’s Stores and / or Outlets and / or in Consolidation /

Deconsolidation Points and / or Processing. Assembly,

Renovation and Repair whether or not in the due course of

transit.”

• All transits and stock can be insured for a “Selling Price”

valuation under the STP. This accommodates any loss of

profit in respect of goods in the current supply chain.


Definition of STP

• Policy can be “All Risk” as well as

manuscripted to include specific perils that

might affect the product, including change in

temperatures, accidental damage by specific

contaminates, etc.

• “Against all risks of physical loss or damage

to the subject-matter insured from any

external cause, including the risks of

spoilage and/or contamination.”


Perils Covered by a STP

• Limitation – the STP may contain a “processing”

exclusion.

• May remove coverage for contamination that

occurs during production.

• First party only.

• Valuation can be written on a selling price basis.

• Each STP needs to be reviewed thoroughly for

limitations.


Stock Throughput Policy

• Most RAC policies contain a “crisis” response

service.

• Requirement of the policy for the insured to use the

crisis hotline.

• Use is not subject to the policy’s SIR.

• But, “crisis response” is not “official” notice to the

insurer.

• Notice to insurer needs to follow the “notice

provision” of the policy – Likely first discovered and

reported within policy period.


Recall & Accidental Contamination

• Provides first party coverage including:

– Recall Expenses

– Business Interruption Costs/Extra Expense

– Increased Cost of Working

– Rehabilitation Expenses

– Consultant Costs

– Adverse Publicity

• Usually contains coverage for malicious contamination/extortion.

• Policy can be endorsed for third party losses -

– Customer Loss of Profits (CLOP)

– Third Party Recall Liability (TPRL)

• Governmental Recall coverage.

• Product Refusal – think of it as “Collateral Damage” coverage.


Recall and Accidental Contamination Policies

• Consider each policy and notice as required to

maximize insurance recovery.

• Example – Ammonia Escape at a third party facility

– Use of R&AC policy’s “crisis hot line” for expert

in dealing with the FDA and state authorities.

(not subject to the SIR)

– Use of STP for surveyors to also work with

regulators to agree to replacement of packaging

only – and for recovery of SIRs from the cold

storage facility.


Practical Approach to Use of Policies Discussed

Thank You!

PRESENTER:

Ed Rhone

Parker, Smith & Feek

425-709-3735

[email protected]

www.psfinc.com

17 © 2016 Parker, Smith & Feek. All Rights Reserved.

Strafford November 29, 2016

1:00 p.m. – 2:30 p.m.

Insurance Coverage for Food

Contamination and Recall Claims

under CGL, Property and

Contamination Policies

Presenter:

Joann M. Lytle, Esq.

215-979-3878

[email protected]

Product Contamination Policy

Provides coverage for loss resulting from an Accidental

Product Contamination first discovered during the Policy

Period.

Can also provide coverage for publicity of an actual or alleged

Accidental Product Contamination.

Product Contamination Policies generally provide first-party

coverage.

Third-party coverage is available via endorsement or through

purchase of a separate recall policy.

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Product Contamination Policy (con’t)

Accidental Contamination:

Any accidental or unintentional contamination, impairment or

mislabeling of an Insured product(s), which occurs during or as a result

of its production, preparation, manufacture, packaging, or distribution;

provided that the use or consumption of such Insured product(s):

(i) has resulted in or would result in clearly identifiable

internal or external physical symptoms of bodily injury,

sickness, disease or death of any person(s) within one

hundred and twenty (120) days following such

consumption or use or

(ii) has caused or would cause physical damage to or

destruction of tangible property other than damage to

or destruction of Insured product(s).

20

Product Contamination Policy (con’t)

Accidental Contamination:

Error in the manufacture, production, processing, preparation, assembly,

blending, mixing, compounding, packaging or labeling (including instructions for

use) of any Insured Products, or

The introduction into an Insured Product of an ingredient or component that is,

unknown to the Insured, contaminated or unfit for its intended purpose, or

Error by the Insured in the storage or distribution of any Insured Products whilst

in the care or custody of the Insured provided that the use or consumption of

such Insured Products has led to or would lead to:

i) bolding injury, sickness, disease or death of any person(s) or

animal(s) physically manifesting itself within 365 days of use

or consumption, or

ii) physical damage to or destruction of tangible property (other

than the Insured Products themselves.

21

Loss Covered

Product Contamination Policies typically provide coverage for

the following categories of losses:

Pre-recall expenses, including chemical analysis of allegedly

contaminated product;

Recall costs

Business interruption

Rehabilitation Expenses Costs to re-establish the product to the projected level of sales or market share

Extortion costs Costs paid in response to a demand made under threat to commit malicious tampering

of a product

Consultants’ costs

22

Loss Covered (cont.)

May provide coverage for expenses sustained by Named

Insured’s customer:

if Named Insured’s product becomes an ingredient or component in a

product manufactured, distributed, or handled by a customer of the

Named Insured

And the Named Insured is required to reimburse said customer

Insurer’s liability for customer’s expenses will not exceed the

expenses the Named Insured would have incurred in recalling

the customer’s products

23

Coverage

Policyholder bears the burden of demonstrating:

An accidental or unintentional contamination, impairment or mislabeling

Of an Insured Product

Which occurs during production, preparation, manufacturing, etc.

Which has resulted or would result in bodily injury or clearly identifiable

internal or external physical symptoms of bodily injury.

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What Constitutes Contamination?

Depending on the specific language of the insuring agreement,

a recall based on the potential for contamination, without

evidence that an insured’s products were in fact contaminated,

may not be sufficient to constitute contamination under the

policies.

See, e.g., Ruiz Food Prods., Inc. v. Catlin Underwriting

U.S. Inc., No. 1:11-cv-00889, 2012 WL 4050001 (E.D. Cal.

Sept. 13, 2012); Little Lady Foods, Inc. v. Houston Cas. Co.,

819 F. Supp. 2d 759 (N.D. Ill. 2011).

25

What Constitutes an Error?

Some policies require an “error” on the part of the policyholder to

trigger coverage. In these cases, it is the policyholder’s conduct

during the “manufacture, processing, preparation, assembly,

blending, mixing, compounding, packaging or labeling” of the

product that a court considers.

In Fresh Express Inc. v. Beazley Syndicate, 199 Cal. App. 4th

1038 (Cal. Ct. App. 2011), the FDA issued an alert advising

consumers not to eat bagged, fresh spinach because of risks

associated with an E. coli breakout. This alert caused the

policyholder to voluntarily recall its bagged spinach. Court

determined recall was caused by FDA alert, not by policyholder

error and coverage was not triggered.

26

What Constitutes an Error? (con’t)

In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd’s,

London, No. 1:14-cv-953, 2016 WL 235211, in contrast, the

Court agreed with the policyholder that there was an “error” as

required by the accidental contamination insuring agreement

where the policyholder “failed to maintain an adequate pest

control program and other sanitary controls.”

27

Preventative Recalls

As noted above, under the plain language of an accidental

contamination policy, a policyholder may not have coverage

for preventative recalls.

In these cases, courts find that the policy only provides

coverage for actual contamination – not losses associated

with the insured’s belief that a product may be contaminated.

See, e.g. Ruiz Food Prods., Inc. v. Catlin Underwriting U.S. Inc., No.

1:11-cv-00889, 2012 WL 4050001 (E.D. Cal. Sept. 13, 2012) (“The

Policy at issue, reasonably interpreted, does not cover losses incurred

to prevent contamination.”).

28

Adverse Publicity

Food contamination and recall events can result in costly

adverse publicity

Chipotle’s recent E. coli outbreak impacted 14 states and 60 people –

this may seem relatively small given that there are nearly 2,000

Chipotle restaurants worldwide and some locations serve more than

300 customers an hour.

Sales declined 14.6% in the last quarter of 2015, and declined 30% in

December 2015 alone, representing an estimated $53 million in lost

sales.

Chipotle’s stock fell from a high of $754 a share in August 2015 to a low

of $404 in January 2016.

Chipotle incurred significant costs in an effort to get customers back into

restaurants, including increased and targeted marketing campaigns and

promotional offers for free or discounted food.

29

Adverse Publicity (con’t)

Accidental Contamination Policy may provide coverage for

losses resulting from “Publicity” implying accidental or

unintentional contamination.

Sample contamination policy defines “Publicity” as:

The reporting of an actual or alleged Accidental Product Contamination

during the Policy Period in local, regional, or national media

(including but not limited to radio, television, newspapers,

magazines or the Internet) or any governmental publication where

the Named Insured’s Product(s) and the Named Insured are

specifically named.

30


An insured may have coverage for adverse publicity even

where the insured’s product does not sustain actual

contamination if the publicity provision includes publicity

related to “an alleged” accidental product contamination.

See, e.g., Wornick Co. v. Houston Casualty Company, No. 1:11-cv-

00391, 2013 WL 1832671 (S.D. Ohio 2013) (denying insurer’s motion

for summary judgment regarding coverage for adverse publicity losses

where product was not contaminated but issues of fact remained as to

whether there was an adverse publication).

A product contamination policy may provide, as a part of

Loss, Rehabilitation Expenses, including:

Reasonable expenses necessarily incurred by the Named Insured to re-

establish the reputation and the market share of the product line which

has been the subject of an accidental product contamination.

31


Policyholder must check its contamination/recall policy’s

exclusions to determine whether coverage for adverse

publicity exists.

Some first-party recall policies contain exclusions for losses associated

with the adverse publicity that may arise after a food recall or

contamination event:

This insurance does not apply to any ‘loss’, cost or expense arising out of,

based upon, attributable to or involving directly or indirectly:

A. Any “adverse publicity”

32

Third Party Coverage

May be available by endorsement

Policyholder may want to purchase a separate recall policy for

third-party coverage.

Third-party recall insurance provides:

“[W]e shall reimburse you for product recall liability damages

resulting directly from a covered incident, provided (1) such

covered incident takes place in the coverage territory, and (2)

the initial oral or written publication of such covered incident

takes place during the policy period.”

33

A Covered Incident

“the recall, removal, recovery of possession or control,

withdrawal or disposal of, or purposeful destruction of your

product(s) from or by a distributor, purchaser, retailer,

wholesaler, or user of your product(s) solely because the use or

consumption thereof has resulted in bodily injury or property

damage, or because the use or consumption thereof poses

actual and imminent danger of resulting in bodily injury or

property damage.”

34

Product Recall Liability Damages

Covered third-party recall damages:

“Any sums that you become legally obligated to pay as

compensatory damages.”

Sums owed pursuant to contract of indemnity or contract of reimbursement

May include business interruption, loss of reputation, lost profits,

transportation and labor costs

Review policy – may not include liquidated or penalty damages

Defense costs

The recall policy may exclude coverage for costs incurred

to replace the recalled product – check policy

endorsements to determine coverage for these costs

35

Common Exclusions

Bodily Injury

Bars coverage for bodily injury, emotional distress or mental

anguish

Property Damage

Bars coverage for “physical injury to or destruction of tangible

property other than your product.”

36

Other Noteworthy Exclusions

There may be exclusions specific to products that are topical

or ingestible

Liability arising out of any pre-existing condition that insured knew of

or reasonably should have known of prior to inception of policy

Liability arising out of intentional acts or omissions that could

reasonably be expected to lead to a covered incident

37

Joann M. Lytle

Partner, Insurance Coverage Group

McCarter & English LLP

Joann Lytle helps corporate policyholders maximize their insurance

assets and has recovered hundreds of millions of dollars for a wide

range of companies, including those in the food services,

manufacturing and health care industries. She has handled

disputes involving commercial general liability, umbrella liability,

errors and omissions liability, directors and officers liability,

employment practices liability and cyber liability policies. In addition

to representing policyholders in coverage disputes, Joann also

provides insurance coverage advice and counseling to her clients

on an ongoing basis. She graduated maxima cum laude from

LaSalle University in 1987 and obtained her J.D., cum laude, from

Harvard Law School in 1990. Business Insurance Magazine

recognized Joann as one of its 2014 “Women to Watch.” In 2014,

she was recognized by Chambers USA as a “Leader in Their Field.”

Joann was selected as the exclusive Pennsylvania winner of the

Lexology Client Choice Award in 2013 and 2014. Joann has also

been recognized in Best Lawyers in America since 2008.

38

PRACTICE GROUP

Insurance Coverage

CONTACT Mellon Bank Center

1735 Market Street

Suite 700

Philadelphia, PA 19103-7501

215.979.3878

[email protected]

EDUCATION

Harvard Law School, J.D.,

cum laude, 1990

La Salle University, B.A., maxima

cum laude, 1987

BAR ADMISSIONS

Pennsylvania

New York

U.S. Court of Appeals, Third Circuit

U.S. District Court, Eastern District

of Pennsylvania

U.S. District Court, Middle District of

Pennsylvania

U.S. District Court, Southern District

of New York

Strafford Publications, Inc. Seminar

Live Webinar November 29, 2016 1:00 – 2:30 pm

Insurance Coverage for Food Contamination and Recall Claims under CGL, Property and Contamination Policies

Presenter:

Robert D. Chesler, Esq.

(973) 642-5864

[email protected]

40

1075972v2 © 2016 Anderson Kill P.C. All Rights Reserved.

Disclaimer The views expressed by the participants in this program are not those of the participants’ employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session.

41


Speaker

Robert D. Chesler, Esq. Anderson Kill, P.C.

(973) 642-5864 [email protected]

42


Peanut Corporation of America

Owner knowingly shipped salmonella tainted peanuts

9 deaths, 714 ill

360 companies and 3900 products affected

Owner sentenced to 28 years in prison

43


1. NOTICE

Give notice early and broadly

Give notice of anything that even smells like it might be a claim

Late notice can be fatal!!!!

General liability (occurrence) vs. specialty policies (claims-made)

44


2. Limits of liability

Are they high enough?

Damages are rising in food contamination cases

Are you sharing your policy with additional insureds?

45


3. General Liability Policy: What is Covered?

Third party claims for:

– Bodily injury

– Property damage

– Personal and advertising injury (disparagement, copyright infringement, invasion of privacy, et al.)

– Does not cover economic loss

Unlimited duty to defend

46


4. General liability policy vs. product contamination policy

Tangible damage vs. economic loss

47


Occurrence

“Accident…neither expected nor intended from the standpoint of the insured.”

– Subjective standard

Naumes, Inc. v. Chubb Custom Ins. Co., 2007 U.S. Dist. Lexis 828634 (M.D. Pa. 2008)

– Coverage where insured accidentally mixed ingredient containing banned product into final product

48


5. What is Property Damage? Glorybee and Sokol

– Sokol & Co. v. Atlantic Mutual Ins. Co., 430 F.3d 417 (7th Cir. 2005) — individually wrapped packages of peanut butter placed in cookie mix box

– Security Nat. Ins. Co. v. Glorybee, 2011 U.S. Dist. Lexis 27257 (D.Or. 2011) — peanuts incorporated into candy

– Shade Foods, Inc. v. Innovative Prod, Sales and Mktg., 93 Cal.Rptr. 2d (Ct.App. 2000) – splinters in cereal boxes

– Silgan Containers Corp. v. National Union, 2010 US. Dist. Lexis 30100 (N.D. Cal 2010) – Defective pull tabs

49


Property Damage

Phibro, Inc. v. National Union Fire Ins. Co., 446 N.J. Super. 419 (App.Div. 2016). Additive that kept chickens from gaining weight caused property damage.

50


Pollution Exclusion Original exclusion – limited to environmental pollution.

Now, much broader ‘absolute’ exclusions exist

See – Pepsico, Inc. v. Winterthur Int’l Amer. Ins. Co., 788 N.Y.S. 2d 142 (App. Div. 2004) – pollution exclusion did not apply to non-environmental pollution – faulty raw materials

Cincinnati Ins. Co. v. Becker Warehouse, Inc., 635 N.W. 2d 112 (Neb. 2001) – xylene fumes contaminated food in warehouse - excluded from coverage.

51


Your Work/ Your Product Exclusions

Atlantic Mut. Ins. Co. v. Hillside Bottling Co., Inc., 903 A. 2d 513 (N.J. App. Div. 2006)

Bottler mixed ingredients into bottled beverages, resulting in ammonia contamination. Court found that bottled beverages were bottler’s product – no coverage.

See also, Nu-Pak, Inc. v. Wine Specialties Int’l, Ltd., 643 N.W. 2d 848 (Wis. Ct. App. 2002)

52


Number of Occurrences Republic Underwriters Inc. Co. v. Moore, 493 F. Appr. 707 (10th

Cir. 2012) – Country Cottage prepared food in its facility

• People became sick at Country Cottage and at catered event

– Is there one occurrence for preparation of food? • Two occurrences for two places where people became sick? • Multiple occurrences – an occurrence for each person who became sick?

– Court found one occurrence, which minimized coverage for insured • Many courts nationally would have found either two or multiple occurrences.

– ‘Number of occurrences’ issue affects structure of insurance program re: deductibles, aggregate limits, and ‘batch clauses’

International Flavors & Fragrances, Inc. v. Royal Ins. Co., 844 N.Y.S. 2d 257 (App. Div. 2007) – 30 claimants alleging popcorn lung – 30 occurrences

53


Property Insurance

PBM Nutritionals v. Lexington Ins. Co., 72 U.S.E.2d 707 (Va. Supreme. Ct. 2012)

– No coverage for product contamination

– Leaking valve sent contaminated water to infant formula ingredients

– No coverage — very broad pollution exclusion.

– Original policy would have provided coverage, but a total pollution exclusion added by endorsement negated it

54


Property Insurance - Contamination

Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281 (10th Cir. 2011): Contamination Exclusion — was there third party damage to trigger property damage coverage. – Contamination of cheese in warehouse

– Only covered if caused by 'other physical damage'

– Damaged fruit in warehouse contaminated cheese

See also, Allianz Ins. Co. v. RJR Nabisco Holding Corp., 96 F. Supp. 2d 253 (S.D.N.Y. 2000) – “peril not otherwise excluded” exception to exclusion.

55


Direct Physical Loss or Damage S. Wallace Edwards & Sons, Inc. v. Cincinnati Ins. Co., 353

F.3d 367 (4th Cir 2003) – exposure to ammonia caused odor and color change

Gerawen Farming Partners, Inc. v. Westchester Surplus Lines Ins. Co., 2008 U.S. Dist. Lexis 4511 (E.D. Cal.2008) pitting of nectarines

Source Food Technology, Inc. v. United States Fidelity and Guaranty Co., 465 F. 3d 834 (8th Cir. 2006) – mad cow disease in Canada caused ban on beef imports; company couldn’t import beef tallow – no physical damage.

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Practice Pointers

Use an insurance broker who has expertise in food insurance.

Review your exposures

Cooperate with your insurance company, but protect your interests.

Do not take “CLAIM DENIED” as an answer from your insurance company.

57


Thank You

Robert D. Chesler, Esq. Anderson Kill, P.C.

(973) 642-5864 [email protected]

Insurance Coverage for Food Contamination and Recall...

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