The hidden risks of foodborne illness claims

However, recent lawsuits involving disputes over insurance coverage for food contamination losses show that executives at food companies can and should do more to protect themselves against the risk of an uncovered claim.  A well-designed policy should include coverage for "voluntary recall," "foodborne illness" and "reputational harm."

Food contamination claims are excluded coverage under standard commercial general liability or commercial property insurance policies. Coverage determinations are fact-specific and driven by policy language. The manner in which a claim is characterized when submitted to an insurer can often be the difference between a covered and an uncovered claim.

Virtually all CGL policies contain a list of standard exclusions that are designed to exclude coverage for certain types of claims that otherwise might be covered.

For example, CGL policies issued to food companies increasingly contain "mold," "bacteria" and/or "contaminant" exclusions that insurers may construe in unexpected ways to deny coverage. Also, an insurance company may argue that food products like yogurt or cheese trigger "fungus" or "mold" exclusions, and claims involving salmonella or listeria trigger "bacteria" or "contaminant" exclusions in CGL policies. It is important to be aware of these general exclusions when purchasing CGL coverage and to negotiate appropriately to ensure that coverage is available.

In addition to these exclusions, which may be buried in the fine print, recent case law shows that companies should be wary of other hidden policy exclusions and limitations to coverage against contamination claims.

Taco Bell faced claims arising out of a foodborne illness outbreak after the U.S. Centers for Disease Control and Prevention determined that the outbreak was most likely caused by E. coli-contaminated lettuce consumed at Taco Bell restaurants. Taco Bell sued Ready Pac Foods, Inc., the likely supplier of the contaminated lettuce, seeking damages for bodily injury and property damage, as well as damages suffered because of the alleged decline in patronage at all Taco Bell restaurants resulting from the outbreak.

After Ready Pac sought coverage under its CGL policies, its insurers sought a declaratory judgment that the policies did not cover the Taco Bell plaintiffs' lost patronage claim on the grounds that claims for economic losses were not covered under the CGL policy. Siding with the insurers, a federal court in California agreed that Taco Bell's claim for reputational damages was not covered under the CGL policies. Thus, Ready Pac had no coverage for a significant amount of Taco Bell's damages.

Related: Food recalls in the digital age

Policies may not provide adequate coverage for certain types of risks, such as the cost of voluntary product recalls, which are becoming increasingly common following passage of the 2011 Food Safety Modernization Act.

In one recent case, an insurer denied coverage for a claim that HoneyBaked Foods made for property damage and business interruption loss under an "all risk" policy after HoneyBaked discovered listeria in several production runs of its meat products that were introduced by contaminated equipment used in the production process.

HoneyBaked took prudent steps to address the issue, including voluntary recall and the destruction of nearly 1 million pounds of contaminated product. The U.S. District Court for the Northern District of Ohio held that the insurer properly denied coverage because the policy contained a contamination exclusion.

Not only do food contamination claims result in financial losses, often times a company's reputation will be affected as well.

Recently, Chipotle has had multiple instances of foodborne illness from E. coli in their meat products from several locations. As a result of this, many people fear that all of their food is contaminated, leading to a noticeable decline in sales.

Economic losses due to reputation from food contamination are not included in CGL policies. The exclusions of food contamination policies in CGL and commercial property insurance are often times hard to distinguish because they are deep within the fine print.

Executives can protect themselves against the risk of an uncovered claim by paying careful attention to the fine print when purchasing commercial general liability and commercial property insurance policies, and by negotiating coverage enhancements to fill potential gaps in coverage.

Therefore, to maximize coverage, food companies should always work closely with their brokers and outside counsel when purchasing policies.

Related: Product recalls, and requests for coverage, on the rise