Protect Against Food Contamination Losses

Salmonella. Escherichia coli. Listeria. These words strike fear in the hearts of in-house counsel and executives in the food industry. Outbreaks of foodborne illnesses—and other incidents involving tainted food—have received a great deal of attention in recent years. In 2007, they reached a new peak: an outbreak of botulism infections caused by canned chili, a recall of more than 21 million pounds of ground beef and hamburger patties due to fears of E. coli contamination, a peanut butter recall related to Salmonella poisoning outbreaks in 47 states, and a recall of baby food allegedly tainted with Salmonella. For the companies involved, the inevitable fallout will include defense and liability costs incurred in large-scale litigation, including consumer class actions, losses due to product recalls and business interruption, damage to reputation, and in some cases, bankruptcy.

Given the risks, businesses in the food industry must assess their insurance portfolios and consult insurance coverage counsel now, before becoming involved in lawsuits and incurring liabilities. Companies defending personal injury lawsuits stemming from foodborne illnesses should confirm insurance coverage immediately, because it may cover such lawsuits. Below, we discuss in more detail the actions that food industry in-house counsel and executives should take to purchase insurance policies that cover the risks associated with food handling—including comprehensive general liability policies—and product recall and foodborne illness coverage. We also discuss some steps that in-house counsel and executives can take to ensure that they obtain the full insurance coverage they are entitled to if their company is the subject of a tainted food claim.

A few facts concerning foodborne illness in the United States from the Centers for Disease Control and Prevention help put the risks faced by companies in the food industry into perspective. Approximately 76 million cases of foodborne illness occur in the United States annually. Approximately 325,000 of those illnesses result in costly hospitalizations, and about 5,000 of them are fatal.

According to one estimate, the medical costs, productivity losses, and costs of premature deaths related to five of the most common foodborne illnesses combine for a total of approximately $6.9 billion in losses annually. There are more than 250 known diseases that can be transmitted through food—most of them caused by bacteria, viruses, and parasites, while others are caused by poisonings from harmful toxins or chemicals. These make up about 20% of all foodborne illness; the other 80% are thought to be caused by unknown or undiscovered agents.

Tainted food incidents can lead to several types of losses for a company. Companies can face millions of dollars in potential liability, in addition to incurring significant defense costs, arising from consumer allegations that they were injured by tainted food. For example, in 2003, a Chi-Chi’s restaurant customer near Pittsburgh, Pa., contracted hepatitis and was forced to undergo a liver transplant. That customer, one of more than 600 people affected by an outbreak eventually traced back to green onions, received $6.25 million to settle his claim.

A $12 million settlement was reached on behalf of five children allegedly injured by drinking E. coli-contaminated Odwalla apple juice in 1996. In the 1993 E. coli outbreak traced to Jack in the Box fast-food restaurants, approximately 600 people were affected; the most seriously injured person settled for $15.6 million. One of the many law firms that specialize in representing consumers in such cases estimates it has obtained hundreds of millions of dollars from food companies and their insurers in court verdicts and settlements.

In addition, companies can face huge losses arising from product recalls. Last year, the Topps Meat Company (Elizabeth, N.J.) was forced into bankruptcy after 67 years in business due to the costs of recalling millions of pounds of meat allegedly at risk of being tainted with E. coli. Following the February recall of 143 million pounds of beef, the Hallmark/Westland Meat Packing Company (Chino, Calif.) may also be forced to file for bankruptcy, and its general manager has said it will probably never reopen.