How comprehensive is your product recall insurance?
John McCarthy, partner in McCarthy & Co Solicitors advises suppliers to check the conditions of their product recall insurance policies
Print18 November 2011
While a recent decision of the Californian Court of Appeal in the case of Fresh Express v Beazley Syndicate will not have any legal application in this jurisdiction, Irish food producers would nevertheless do well to heed the ruling from the perspective of their ability to recover insured losses in the context of a product recall.
In September 2006 the United States Food and Drug Administration (FDA) issued an official alert advising consumers against eating bagged fresh spinach due to an outbreak of E. coli (VTEC O157) that was possibly linked to consumption of that product.
The alert was ultimately lifted two weeks after it was issued, at which point the FDA had traced the outbreak to contaminated spinach processed by a single supplier. No bagged spinach from any other producers, including Fresh Express, was ever implicated.
Do your suppliers comply with food safety rules too?
However, on having carried out an internal audit prompted by the FDA advisory, Fresh Express established that it had failed to adhere to its own internal product purchasing rules in that in August 2006 it had bought fresh bagged spinach from two farms that did not comply with its own food safety rules.
Fresh Express never actually issued a recall but having learned that it had breached its own food-safety procedures shortly before the outbreak it decided to cease all production and shipping of bagged spinach because it did not believe itself to be in a position to seek an exemption from the FDA advisory.
The company estimated that it suffered $18.8 million in losses and consequently it submitted a claim under its recall policy, for which it had paid a premium of over $300,000 to Beazley for 12 months’ cover.
Beazley responded by stating that cover did not apply in the circumstances and it refused to pay out on the claim, prompting Fresh Express to issue legal proceedings.
In August 2009 it was ruled that Fresh Express was entitled to recover the full $12 million sum covered by the recall policy because its errors gave it reasonable cause to believe that its products were the source of contamination, thereby preventing it from seeking an exemption from the FDA.
John McCarthy
John McCarthy
Beazley appeals decision
Beazley appealed this decision arguing that, as there was in fact no accidental contamination by Fresh Express, cover should not apply. Beazley also contended that the losses incurred were not as a result of the failure to follow its own purchasing procedures but as a result of the E. coli outbreak itself.
The appeal court ruled in Beazley’s favour, finding that the losses incurred were largely due to the loss of confidence in spinach by the public resulting in a lack of demand rather than either the recall or any errors that Fresh Express might have made.
Fresh food producers in the US are understandably dismayed by the ruling, pointing out that fresh fruit and vegetable recalls are almost always voluntary, with the decision to recall being triggered by several different types of occurrence. It is extremely rare at the time that the recall decision is made that the source of contamination has been definitively identified.
Fresh Express’ lawyers had argued in vain that the purpose of recall cover was to provide insurance for decisions made by policy holders in real time based on limited information, meaning that it was unrealistic for a food producer to be expected to know with certainty whether or not they had actually been the cause of accidental contamination when the decision to issue a recall was made.
Unsuccessful in negotiating meaningful policies
Industry representatives have also highlighted the fact that, despite their best efforts since the 2006 E. coli outbreak, they have been unsuccessful in negotiating meaningful total recall policies which cover all of the recall triggers that can occur in the fresh food industry.
It is a source of concern that the decision in Beazley’s favour may result in food producers being more reluctant to issue a recall for fear that they may not be deemed to be entitled to recover their losses from their insurers. It is not difficult to imagine a situation where this hesitance could significantly increase the risk of foodborne illness being contracted by consumers.
Consult the small print
While individuals would of course be wise to consult the “small print” of their product recall policies in the light of Fresh Express’ misfortunes to satisfy themselves as to what is and is not covered in the context of voluntary product withdrawals, producers should never lose sight of their various obligations under the applicable food safety laws, including regulation nine of the European Communities (General Food Law) Regulations 2007 and 2010 which provides that a food business operator is guilty of an offence if they fail to initiate procedures to withdraw a food where they have reason to believe that it is not in compliance with all relevant food safety requirements.
The Fresh Express decision has shown us that, even having paid out substantial premiums for product recall insurance, food producers may well learn that, when the dust has settled, the terms of their policy could mean that they are left without cover.
John McCarthy is a partner with McCarthy & Co. Solicitors (www.mccarthy.ie) in Clonakilty who specialises in food law and foodborne illness claims. He can be contacted by telephone on 023 883 3348 or by email at john@mccarthy.ie.
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