When the Centers for Disease Control (CDC) issued a stark warning just before Thanksgiving about E. coli and romaine lettuce, restaurants and grocers across the country amended menus and pulled the produce from shelves.
In the days since that warning, the CDC has said the lettuce is likely safe to eat, as long as it was not grown in the Central Coastal region of California. In the meantime, 43 people in 12 states have reportedly been sickened with infections linked to the contaminated romaine.
The romaine recall is the latest in a year of widespread food recalls, which experts say are on the rise because of grower consolidation, shifting food-buying habits and fears about million-dollar lawsuits. Food sellers, preparers and distributers can protect themselves against financial loss and reputational harm with comprehensive Product Recall or Restaurant Contamination Insurance policies.
Beyond romaine: Food recalls on the rise
In mid-November Hormel Foods recalled tens of thousands of pounds of ground turkey in response to a Salmonella outbreak. Raw chicken, ground beef and cake mix products have also been recalled in recent weeks for suspected Salmonella contamination. And more than 250 consumers are thought to have been sickened by contaminated eggs and romaine lettuce involved in a multistate recall earlier this year.
The Stericycle Recall Index showed an influx in food recalls in its February 2018 report. It revealed that “food products recalled by the U.S. Food and Drug Administration skyrocketed 92.7 percent since 2012.” The USDA released data highlighting an 83.4 percent increase in meat-related recalls over the same period.
The insurance industry estimates that there are two food-related recalls in the U.S. every three days, said Nicole Greene, Associate Vice President, Professional and Executive Liability Center of Excellence, Burns & Wilcox.
Biological contaminations are the most common reason for a food recall, Greene said; the second most prevalent reason is mislabeled food, which has become a more prevalent problem in recent years.
“There are more federal labeling requirements now that require details about where an item was produced or to inform consumers of allergens,” Greene said. “If a product’s label does not completely provide information required by law, a recall will occur.”
Industry trends, lawsuits impact food recalls
Like many industries, food producers and growers have seen a significant amount of consolidation in recent years, which has contributed to the rise in recalls, said Michael Muglia, Underwriting Manager, Professional Liability Center of Excellence, Burns & Wilcox. This consolidation means one outbreak is likely to result in a much larger consumer impact, since each distribution network is responsible for more food items as the industry contracts.
Additionally, the ability to accurately track food production is still difficult, Muglia added.
“Many growers and distributors in the food production industry are still not as technologically advanced as you would like, so tracking and logistic metrics can be difficult to get,” Muglia said. “Most are moving toward a more computer-based system, but it will take time to effectively implement.”
As with many consumer goods, shifting consumer preferences are also having an impact, Greene said. Consumers are spending less time prepping food and eating out more frequently. Yet there is an increased desire for fresh, locally sourced food.
The food industry has heightened sensitivity as a result of an increasing number of lawsuits against food manufacturers, producers, distributors, supermarkets and restaurants, Greene said. Often a defendant will name multiple organizations during the early stages of a lawsuit until the source of the contamination is found. Just being named in a lawsuit, even if an organization is found to be not at fault of an outbreak, will usually result in significant financial ramifications.
“In most cases we as consumers have no idea about the path the tomatoes took to get to the supermarket, but we know which supermarket we bought the tomatoes at, and who to name in a lawsuit if we get sick,” Muglia said. “This ever-present litigation exposure is why supermarkets are pushing back on their suppliers to make sure they have the right insurance policies for protection in the event of a foodborne illness event.”
Earlier this year the Monsanto Company was ordered to pay $289 million in damages for cereal that contained glyphosate residue in one of the largest food-related lawsuits in recent months. Rachael Ray Nutrish dog food was named in a $5 million class action lawsuit for similar contaminants.
This increase in lawsuits is not surprising considering that the FDA estimates there are about 48 million cases of foodborne illness annually, which means one in six people become sick each year. On a macro level these illnesses resulted in an estimated 128,000 hospitalizations and 3,000 deaths.
Any company that handles food should consider liability insurance a necessity
Product Recall Insurance can help cover a range of recall costs for growers, suppliers and distributors, Muglia said. Such policies cover costs related to product replacement, consultant fees for professionals responsible for identifying the issue, public relations, component parts costs, employee wages, loss of revenue, downtime and more. Supermarkets also benefit from similar coverage tailored to their needs.
Restaurants should consider Restaurant Contamination policies, which are geared toward coverage of contaminations caused by food preparation, Muglia said. Such a policy covers liabilities similar to that of a Product Recall policy, including those that have an adverse impact on an organization’s reputation.
“You could have a brand that is damaged for a significant amount of time after a contamination event, especially if it goes viral on social media,” Muglia said. “These policies can cover regulatory expenses, legal costs and more.”
Organizations should work with their insurance broker or specialist to determine the type of coverage required to best protect their interests.
“This type of insurance really does help to address costs associated with the brand and public outreach—even future advertising in the wake of a costly recall—but more than anything it protects an organization’s balance sheet,” Muglia said.
Even for smaller food service providers, insurance is recommended. The minimum damage claim for any restaurant is likely to be $5,000, Muglia said.
Any food-related company should consider some type of liability insurance mandatory, Greene said, and the cost is small considering the available protection. She estimates that the average Product Recall policy may cost $5,000 per $1 million in coverage. Companies with revenues of $10 million or more will want to consider increasing their coverage to a level more appropriate to their potential exposure to financial loss.
“That is really a bargain, as pre-incident consulting is often included with most of these policies. Businesses have access to specialists that can walk them through the steps needed to prevent such outbreaks—including the creation of protocols,” Greene said. “It is really an underused risk prevention benefit that can help diligently protect against an outbreak.”
Muglia believes that every business involved in the food industry should work with an insurance broker experienced in Product Recall and Restaurant Contamination policies to determine the best coverage tailored to its unique risk profile.
“No matter where you are in the food chain, or how strictly enforced your safety policies are, the unforeseen can happen”, Muglia said. “You need to have an honest conversation with your broker and review the scenarios of how to protect your organization.
Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.
This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent to review your Product Recall or Restaurant Contamination coverage, or any other related policies, to ensure you have proper protection.