Westlaw Journal PRODUCTS LIABILITY Litigation News and Analysis Legislation Regulation Expert Commentary VOLUME 24, ISSUE 4 / JUNE 2013 Expert Analysis Potential Rise in Rood-Related Product Liability Claims Calls For Proactive Risk Management By Jonathan Cohen, Esq., and Emily Grim, Esq., Gilbert LLP Despite improvements in food safety standards over the last two decades, several incidents of food contamination in recent months suggest that foodborne illness is still on the rise. In December the U.S. Food and Drug Administration reportedly discovered salmonella at an Indiana farm that, less than earlier, had recalled its cantaloupes after the FDA linked the fruit to a salmonella outbreak that allegedly killed three and sickened hundreds. Shortly thereafter, a national bagel restaurant chain issued a recall of a smoked salmon product after its supplier notified the company of a potential bacteria threat. These outbreaks are not anomalous. Recent years have seen a significant uptick in food contamination events. A recent study by the U.S. Public Interest Research Group estimates that the number of Americans falling ill or dying from eating tainted food has jumped 44 percent since just 2011. Other studies have shown a similar increase in food-related incidents. According to the Centers for Disease Control and Prevention, each year about 48 million Americans fall ill, 128,000 are hospitalized and 3,000 die because of food contamination. That means as many as 15 percent of Americans contract a foodborne illness annually. With food contamination on the rise, even food companies that maintain strict quality control standards and perform extensive due diligence on their suppliers may face a recall or product liability claims. And, because food industry supply chains are long and complex, even problems experienced by small ingredient makers can lead to, and recently have resulted in, widespread recalls costing millions of dollars and creating potential tort liability for numerous food manufacturers, distributors and retailers. In light of this trend, food companies at all levels of the supply chain should prepare a careful recall risk-mitigation plan by following three essential steps.
WESTLAW JOURNAL PRODUCTS LIABILITY Identify risk in sufficient detail to enable an effective risk-mitigation strategy To prepare for a recall or food contamination incident, a company should begin by evaluating its potential risks. The company should collect data from executives, managers and other employees with the best knowledge of potential problems. Companies should focus on the details of these risks, defining them as specifically as possible. A company might begin with a broad obser-vation of a potential liability or exposure, such as, We are concerned about a contaminant being introduced into our product through a tainted ingredient. That observation, though, should be only the start of the risk assessment. The firm should follow up with key personnel, including executives, managers and others, to break this broad observation into more detailed and well-defined elements. For instance, a company might break the tainted ingredient concern into numerous contributing risks, such as, We are concerned that we will not be able to recover from a Chinese supplier if one of its ingredients contaminates our product, or, We are concerned other companies in the supply chain will seek to recover costs of recall, including brand damage, if our product becomes contaminated. Although a company s first step to remedy these risks should be improving quality control and assurance standards, companies should recognize their fears may become reality even with the best quality controls. Thus, companies should match their specific risks against the risk-mitigation strategies and insurance assets they have, or could have, in place. According to the CDC, each year some 48 million Americans fall ill, 128,000 are hospitalized and 3,000 die from food contamination. Match well-defined risks with vehicles for protection The purpose of breaking risk into well-defined components is to enable the company to match those risks with the protections that the company has in place, and also to identify areas where the company may lack adequate protection. Companies should recognize all the available vehicles for protecting against risk, such as insurance coverage, indemnities, additional-insured provisions or other less traditional mechanisms such as bonding or risk-pooling. In choosing the right risktransfer strategy, they should consider that the broadening of food supply chains has decreased the effectiveness of certain traditional risk-spreading techniques. For instance, two recent U.S. Supreme Court decisions have limited federal jurisdiction over suits against foreign manufacturers under certain circumstances. Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846 (2011); J. McIntyre Machinery Ltd. v. Nicastro, 131 S. Ct. 2780 (2011). This potential narrowing of federal jurisdiction means food manufacturers may have more difficulty pursuing claims against foreign ingredient manufacturers, particularly in countries like China that have imposed high obstacles to suing local companies in their courts. These obstacles could render indemnities from those companies less valuable. Similarly, if a foreign supplier has insurance coverage that purports to apply to a domestic food company, it is important to confirm that the insurance was purchased in a jurisdiction that allows the domestic company to pursue that coverage. For the same reasons lawsuits are challenging against the supplier, lawsuits against the suppliers foreign insurers also may be difficult. 2 2013 Thomson Reuters
VOLUME 24 ISSUE 4 JUNE 2013 States also have varying and evolving law that could limit the enforceability of indemnities or negate related insurance procurement requirements in supplier contracts. Companies should review the language of the indemnity they give and receive, thoroughly analyzing whether these, or other, provisions would be affected by the laws most likely to apply. Companies also should be prepared to look to their own insurance portfolios if the indemnities or additional-insured provisions of a supplier s policies fail. In assessing the types and amount of coverage they have, companies should analyze the specific language of their insurance policies to ensure their coverage provides the protection they expect. Companies should recognize that no insurance portfolio perfectly covers all the risks they might identify. Where a company identifies a potential coverage gap, it must consider the costs and benefits of filling those gaps. It is not always desirable, or even possible, to fill every gap or limitation in coverage. Still, it is important for companies to know their coverage limitations so riskmanagement decisions are well-informed. For example, although most food companies maintain commercial general liability policies that often cover the costs and liabilities arising from third-party bodily injury or property damage claims, those policies generally contain exclusions that bar coverage for some claims and costs associated with a product recall. After analyzing their recall risks including potential third-party claims by companies farther up the supply chain for their own recall costs companies should determine if their coverage is sufficient. Food companies at all levels of the supply chain should prepare a careful recall riskmitigation plan by following three essential steps. Companies can assess coverage sufficiency using industry benchmarks, as well as considering the extent of protection needed to advance their business goals in the face of a recall or contamination incident. This assessment might include a potential recall s likely impact on a company s brand reputation, finances and ability to preserve relationships throughout the supply chain. Thus, assessing the sufficiency of the amount and types of a company s coverage should ultimately turn on strategic business judgments about its willingness to accept risk and the costs and benefits of taking steps through insurance or other contractual means to spread that risk. In that light, many firms may find specialty contamination and recall policies useful additions to a risk-mitigation portfolio, but others may decide the risk associated with a recall does not justify the expense of obtaining a recall policy, particularly where a company has concerns about the breadth and cost of the coverage provided. Understand the legal positions insurers may take to limit coverage In choosing the extent and types of coverage to maintain, food companies costbenefit analyses must consider the likelihood and strength of arguments insurers might assert to avoid or narrow coverage once a claim arises. Initially, evaluating a company s coverage portfolio entails a review of the policy s language. Companies should not restrict their analysis to the language used in a specific policy form, however. Rather, they should evaluate that language in light of the legal trends and coverage positions insurers recently have taken. 2013 Thomson Reuters 3
WESTLAW JOURNAL PRODUCTS LIABILITY For example, the language of product contamination and recall policies varies substantially regarding what event triggers insurers coverage obligations. One of the key triggers companies often seek is an accidental contamination of their products that requires a recall to avoid spreading foodborne illness. Virtually all modern recall policies applicable to food companies contain an accidental contamination trigger, but recent cases show that insurers and policyholders sometimes disagree as to what exactly must happen for those policies to activate. Insurers recently have argued, with some success, that recall policies limit coverage to recalls of contaminated products policyholders can prove actually were contaminated with a dangerous microbe. In Little Lady Foods Inc. v. Houston Casualty Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011), a food maker recalled a product after testing revealed the presence of listeria. At the time of the recall, it did not know if the listeria was of a strain that causes bodily injury. Afterward, tests concluded that the listeria was not the type that could cause such injury. Two recent U.S. Supreme Court rulings have limited federal jurisdiction in suits against foreign food suppliers under certain circumstances. Based on these tests, the U.S. District Court for the Northern District of Illinois concluded that the recall did not trigger the policy s requirement that the recall resulted from contamination that may likely result in bodily injury. This result was despite the fact that the insured s product had tested positive for listeria, and that the company had acted responsibly in recalling the product to prevent consumer harm. At least one court has relied on Little Lady in denying recall coverage. In Ruiz Food Products v. Catlin Underwriting U.S. Inc., No. 1:11-cv-00889, 2012 WL 4050001 (E.D. Cal. Sept. 13, 2012), the court found that a recall would not trigger the accidental contamination requirement in Ruiz Food s recall policy unless contamination or impairment is actually present in the recalled product. If other courts follow the Little Lady or Ruiz Food holdings, recall coverage could afford materially less protection than many policyholders might expect. So far, though, at least one court has distinguished Little Lady to reject an insurer s effort to avoid coverage. In Hot Stuff Foods v. Houston Casualty Co., No. 11-4055, 2012 WL 2675225 (D.S.D. July 5, 2012), a federal district court distinguished Little Lady and rejected the insurer s attempt to avoid its coverage obligations under a recall policy. Hot Stuff Foods was a sausage manufacturer with an insurance policy covering expenses incurred in connection with product tampering or contamination. Because of a Hot Stuff packaging error, sausages with the preservative MSG were labeled as not containing it. Hot Stuff launched a Class III recall, which the FDA defines as involving products that likely will not cause adverse health consequences. The company then turned to its insurer for coverage of recall-related expenses, contending the MSG was a contaminant under the policy s terms and could cause bodily injury. The insurer denied the claim and, citing Little Lady, pointed to expert testimony at trial that MSG likely could not cause bodily injury. The court rejected the insurer s argument, finding that, regardless of the recall s Class III designation, the policy terms providing coverage for a product that may likely cause illness would be satisfied if 4 2013 Thomson Reuters
VOLUME 24 ISSUE 4 JUNE 2013 there were any possibility of illness resulting from MSG ingestion not, as the insurer argued, a probability of illness. Under this standard, the court determined that the recall constituted accidental contamination because MSG may likely result in physical symptoms of bodily injury, sickness or disease or death of any person. The Hot Stuff court distinguished Little Lady based on its finding that undisputed evidence proved MSG might cause injury in at least some instances, whereas the listeria at issue in Little Lady had no meaningful possibility of causing injury. While Hot Stuff represents a major win for policyholders facing coverage denials due to policy-based bodily injury requirements, it also serves as a reminder that policyholders must be vigilant about their choice of language in food recall policies. Had Little Lady, Ruiz Food and Hot Stuff procured policies with language that made clear coverage would be triggered by a reasonable belief that contamination could cause bodily injury, all might have avoided costly litigation, and Little Lady and Ruiz Food might have had coverage to pay for some or all their recall costs. CONCLUSION Food contamination may be on the rise, but by performing a comprehensive analysis of risk exposure and potential coverage options, and carefully wording recall policies to maximize coverage, companies can ensure they have the right protection. Jonathan Cohen is a partner at the Washington law firm Gilbert LLP. He can be reached at 202-772-2259. Emily Grim is an associate at Gilbert LLP and can be reached at 202-772-3926. 2013 Thomson Reuters. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit www.west.thomson.com. 2013 Thomson Reuters 5