Anyone producing a dairy product knows the multiple steps involved in developing a rigorous Food Safety Plan. Dairy processors go to great lengths to identify GMPs, biological hazards and develop preventive controls for allergens, sanitation and supply chains on a pre-event (preventive) basis. So how is it, after such care is taken to produce safe, high-quality products, the processor has sub-par product liability coverage and at times, no coverage at all?

The answer to this lack-of-coverage question lies in multiple factors.

Oftentimes, leadership within dairy processing companies are under the impression that the coverage they purchased includes liability protection against bodily injury caused by consumption of their product. This is true to a point. For example, typical insurance policies would provide product liability coverage if a consumer breaks a tooth on a foreign matter found in your cheese.

However, dairy processors cannot assume they have insurance coverage for major liability concerns such as bacterial foodborne illnesses caused by such common pathogens as Listeria monocytogenes.

What exactly is product liability coverage and why is it so critical? Product liability coverage is a component of General Liability coverage and is the basic building block of a robust insurance program.

Dairy processors can purchase product liability coverage for foodborne illnesses related to Listeria and other commonly found bacteria. But it is critical to know that very few insurance policies provide this coverage automatically. One cannot assume when buying an off-the-shelf policy that this coverage is included.

It is the duty of the insurance agent or broker to customize your insurance program, to the degree possible, to provide this specific coverage for your food products. And, it is critical that the dairy processor verify, for certain, whether the policy they have selected includes affirmative coverage for foodborne illness.

Companies of all sizes and sophistication can be victims of inadequate coverage.
For example, during a meeting with a multi-million-dollar Wisconsin-based dairy processor, with domestic and international sales, we explained the pervasive problem of lack of liability coverage. At their request, we performed a comprehensive coverage audit and discovered they had absolutely no product liability coverage for Listeria. This, despite the fact that their insurance was placed with a publicly-traded, national broker and a well-known national insurance company.

At our recommendation they moved their policies to another insurance carrier that would be a better fit. As a result, the company is now covered with appropriate product liability coverage at no additional premium.

A similar situation occurred with a small cheese plant in a rural Wisconsin town. The cheese maker’s local insurance agent had placed coverage under a policy that lacked product liability applicable to Listeria. To remedy the situation, the cheese maker opted to purchase an additional insurance policy to fill the gap at a modest additional premium.

What could have happened in these two cases had a product liability claim occurred without sufficient product liability coverage?

The size of your organization is irrelevant to having or lacking product liability coverage. What is critical in the insurance coverage space is that you are aware of the correct questions to ask to confirm that you have coverage.

Today’s issues with inconsistent product liability coverage can be traced back to 1986 when the Insurance Services Office (ISO), the larger of two national insurance service organization that collects statistical data and develops standard insurance policy coverage forms on behalf of insurance companies, created the “absolute pollution exclusion” under general liability insurance policies.

ISO created the exclusion due to the emergence of environmental litigation which was previously not contemplated in actuarial rating models for general liability insurance. The absolute pollution exclusion has since evolved but remains alive and well as a coverage defense against providing coverage for contaminants, like Listeria, that cause foodborne illnesses.

After 1986, insurance companies created a new policy called a Pollution Policy. For the last 31 years, insurance companies have continued to evolve a wide variety of related pollution exclusions to clarify their intent to either cover or not cover certain contaminants or pollutants.

In addition, courts throughout the US have wrestled with the applicability of these evolving exclusions when it comes to food related issues. The result: confusion on behalf of purchasers of insurance regarding their coverage and inconsistency from state-to-state in interpretation of the policies.

According to the International Risk Management Institute, Inc. about one-third of the state-level courts are considered “pro-policy holder” states. In other words, when the policyholder (i.e. food manufacturer) and the insurance company end up in court, the court system tends to side in favor of the policyholder.

About one-third of the states are considered “pro-insurer” states holding the applicability of the exclusion in favor of the insurance company. The remaining states are described as “intermediate states” with further mixed results.1

Therefore, for a dairy processor to rely upon a court to determine their coverage after an outbreak would be haphazard at best.

Another critical facet of the product liability coverage is that it is a scheduled underlying policy to your Umbrella or Excess Liability policy. In other words, an umbrella policy sits on top of your general liability limit of insurance to give an organization higher limits. A common situation would be for a dairy to have a $1 million per occurrence general liability limit with a $10 million umbrella on top of it to give the organization a total available limit for any one occurrence of $11 million.

An umbrella coverage is of no use if the organization has an exclusion applicable to Listeria in the underlying policy. The same exclusion is typically applicable to this excess liability (umbrella) policy as well. This was the case with both the larger organization and the smaller dairy mentioned earlier.

It is imperative to have affirmative coverage under your primary General Liability policy in order to trigger coverage under your Umbrella or Excess liability policies. If foodborne illness is excluded under your general liability, it is extremely doubtful you’d find any coverage under your umbrella policy. The other approach would be to address it via a pollution liability policy which we will cover in future articles.

What would happen if your company had purchased a sub-par product liability insurance policy?

As an illustration, let’s use as a case study, a situation earlier this year in which two people died and four more were hospitalized due to a Listeria outbreak that was linked to a New York cheese plant.

If your company has a similar occurrence, without adequate product liability coverage you would find yourself tied up in a coverage dispute with your insurance company for months, possibly years. The fact that four states were involved may be a factor, but typically the governing law on the coverage dispute with your insurer will most likely be from the state you purchased your insurance policy or entered into the insurance contract.

In the meantime, your financing sources to defend yourself should your insurer refuse to defend and ultimately pay claims would be a) your balance sheet, b) capital infusion of private equity or if you are fortunate, potentially your lender.

Also, consider the fact that you would have no insurer assistance in identifying the source of the contamination or potential contractual protections you may have from suppliers or third parties if they were linked to the source. In addition, you may have contractual liability to defend others such as retailers who sold your product.

Most dairy processors would be fighting for economic survival in this situation. With proper and adequate coverage, this scenario is avoidable.

To avoid a nightmare scenario such as this, consider a third party policy audit on your product liability coverage. Audits are commonly done by an independent source such as a lawyer, insurance broker or third party consultant who specialize in food.

Future articles will address associated expenses for product recall, crisis communication, facility contamination or waste water pollution exposures, workers’ compensation coverages and international exposures.

1Reference Connect, IRMI Pollution Coverage Issues 11/01/16

For more information, call (800) 272-2443 or visit www.m3ins.com.

Jim Brunker

James Brunker CPCU, CIC, is a Partner and Senior Account Executive at M3 Insurance. M3 Insurance offers insight, advice and strategies to help clients manage risk, purchase insurance and provide employee benefits.
For more information, call (800) 272-2443, jim.brunker@m3ins.comor visit www.m3ins.com.

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