PRODUCT RECALL CLAIMS: ARE YOU COVERED? (CLM018)

Transcription

1 NYI:

2 PRODUCT RECALL CLAIMS: ARE YOU COVERED? (CLM018) Speakers: Elisabeth Eckles, Director, Global Claims, Coca-Cola Company Edward M. Joyce, Partner, Jones Day

3 The views expressed by the speakers are not those of the speaker s employer, firm, clients, or any other organization. The opinions expressed do not constitute legal or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session.

4 Learning Objectives At the end of this session, you will: Decipher relevant insurance policy provisions for product recalls Develop a good paper trail when presenting product call claims Identify and address pitfalls when navigating product recall claims

5 Are You Covered?

6 Why Are Recall Actions on the Rise? An increasingly complex and global supply chain (more ingredients coming from more sources; more easily interchanged) Increased complexity and dispersion of manufacturing including the use of co-packers Regulations and labeling requirements have increased substantially world wide, partially driven by large scale, highly publicized contaminations (i.e. egg shell salmonella, swine/bird flu, mad cow) As regulation and scrutiny increases, the number of problems discovered increases

7 Why Should You have Recall Insurance? Product recall actions have tripled in the last 10 years 79% of all FDA pharma recalls and 55% of all medical device recalls in the 4 th quarter of 2014 were nationwide. NHTSA initiated a record number of auto recalls resulting in the largest number of units affected, 64 Million more than the last 3 years of recalls combined. USDA Reports that there were 31 recalls of meat poultry or processed egg products the highest number of events tracked since the 1st quarter of 2012 The CPSC recalled 42 million units in 2014; most commonly in home furnishing and fixtures.

8 Why Should You have Recall Insurance? In 2014 the leading causes for recalls: medical devices: packaging, leaking and labeling Pharmaceuticals: particulate/foreign matter and failed specifications Food & Beverage: Allergens (Mislabeling), followed by salmonella and listeria Contamination sources, particularly in food and pharmaceuticals include both labor and material (increased use of co-packers/processors). Increased consumer awareness along with increasing regulation and scrutiny is driving an increase in the number of problems discovered and a significant increase in the number of units recalled and companies impacted.

9 Product Recall Commercial General Liability Policy Third party liability claims Defense (does not exhaust limits) Indemnity (limits) Other people's insurance (OPI)

10 Recall Insurance Policies First party coverage -- your losses Third party coverage -- clients/customers losses

11 First Party Recall Policy No standard form What losses/expenses/costs are covered? Business income losses/business interruption Profits lost Recall Costs/expenses Rehabilitation costs to protect brand Crisis costs/fund to deal with bad publicity

12 What Recall Costs/Expenses Lab testing Cleaning expenses Notice to all relevant parties Removal of products Are Covered? Disposing/transporting the product Extra labor costs

13 Lab testing Quantification Issues: Recall Costs/Expenses Cleaning expenses Notice to all relevant parties Removal of products Disposing/transporting the product Extra labor costs

14 Quantification Issues: Lost Profits, Other Expenses Business income losses/business interruption Rehabilitation costs to protect brand Crisis costs/fund to deal with bad publicity Extra labor costs

15 What Is a Covered Incident? Any inadvertent or unintentional contamination or mislabeling of a covered product Occurs during or as a direct result of the product's production, preparation, manufacture, packaging or distribution

16 What Is a Covered Incident? Use or consumption of the product has resulted or would result in bodily injury within one year [or x number of days] following such use or consumption Caused or would cause damage to or destruction of property

17 What Is a Covered Incident? Disputes may take place regarding whether there is insurance coverage when the recall takes place before there is actual bodily injury Burden of proving an incident who has it?

18 Potential Exclusions Insurance company has burden of proving application of exclusions Types of exclusions Carcinogenic Known risk/known loss Deterioration and/or decomposition of product (like wear & tear/corrosion exclusion in all risk policies)

19 Case Law Fresh Express FDA advisory in Fall contaminated spinach pulled from shelves No Fresh Express recall but violated its own policy re audits Fresh Express incurred millions in losses

20 Case Law Fresh Express Trial court said audit violation was error that triggered coverage Appellate court says that error did not cause FDA advisory which resulted in recall -- no coverage

21 Case Law Little Lady Burritos tested positive for listeria and product could not ship until further testing completed to eliminate toxic strain of listeria Little Lady sought coverage for expenses because it was likely that product would cause injury

22 Case Law Little Lady Court found no coverage because product did not contain toxic strain - while it was likely that product was contaminated, it was not likely that contaminated product was dangerous Objective versus subjective test?

23 Case Law Caudill Seed Policyholder purchased contaminated peanuts from PCA so it recalled its product that incorporated those peanuts Recall policy covered manufacture and preparation of the product

24 Case Law Caudill Seed No coverage for contamination of peanuts that went into the product prior to the manufacture and preparation of the product P.S. insurance company admitted coverage for another recall involving contaminated alfalfa seed caused by policyholder's error and resulting in salmonella but disputed damages/costs associated with that recall

25 Case Law Windsor Food Policyholder recalled its frozen Mexican food product which incorporated ground beef supplied by Westland/Hallmark Meat USDA announced voluntary recall of Westland s beef for two year period based on potential risks that cattle may have been infected with mad cow disease Recall policy covered production, manufacture, packaging or distribution of Windsor Food s product

26 Case Law Windsor Food Insurance policy is unambiguous; no coverage for potential contamination of supplier s ground beef that went into the frozen food product prior to its manufacture and preparation 2-1 appellate decision dissent asserts the policy is not clear and unambiguous; more reasonable interpretation is that the product and all of its ingredients are insured regardless of when adulteration occurs

27 Case Law Hot Stuff Foods Policyholder recalled almost 200,000 cases of sausage breakfast sandwiches Hot Stuff discovered the sandwiches had been mislabeled as another type of sausage sold by Hot Stuff that does not contain the flavor enhancer MSG Lower court granted summary judgment in favor of Hot Stuff finding coverage for all recall costs.

28 Case Law Hot Stuff Foods Appellate court reversed and found that recall policy is only required to cover products that may be likely to cause harm or injury Whether consumption of the mislabeled sausage product may likely result in physical symptoms of sickness or disease is a genuine dispute of material fact that cannot be answered by a summary judgment record consisting of inconclusive government reports and dueling expert opinions The jury must resolve the coverage obligations here

29 Minimizing Your Losses Have a crisis plan and execute it swiftly No amount of insurance can replace the customer confidence lost to a poorly executed recall and communication plan Be clear and specific about the products affected, particularly if customers or other third parties are executing the recall

30 Maximizing Your Recoveries Understand your available policies Assemble a cross functional task force (marketing, legal, PR, risk management, accounting, operations) to: assess and estimate losses prioritize recovery efforts understand and capture the incremental costs beyond the immediate out-ofpockets Develop a loss accounting and documentation system Quickly communicate thoughtful, initial estimates of loss to your carrier and develop a cadence for communicating interim losses

31 Best Practices Lessons Safety Committees Broad functional representation Review customer complaints Learned Review industry trends/track recalls in your and related industries Well articulated Crisis Plan List of first priority contacts and List of external contractors (media/pr, Legal, etc.) Well Established Employee Reporting/Communication Mechanism

32 Questions?