Edward Rhone, Principal, Claims Manager, Parker Smith & Feek, Bellevue, Wash.

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Insurance Coverage for Food Contamination and Recall Claims under CGL, Property and Contamination Policies Navigating Scope of Coverage, Coverage Triggers, Relevant Exclusions and Policy Language Interpretation TUESDAY, NOVEMBER 29, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Robert D. Chesler, Shareholder, Anderson Kill, Newark, N.J. Joann M. Lytle, Partner, McCarter & English, Philadelphia Edward Rhone, Principal, Claims Manager, Parker Smith & Feek, Bellevue, Wash. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Insurance Coverage for Food Contamination and Recall Claims under CGL, Property and Contamination Policies Edward Rhone

6 Practical Use of Policies There can be overlapping coverage between CGL, Property, Stock Throughput and Products Recall & Accidental Contamination. Each has specific triggers to consider. Each has other insurance language. Review of policy features to utilize Parker, Smith & Feek. All Rights Reserved. 6

7 Overlapping Coverage Based on facts of the event, each policy should be reviewed for possible coverage grants. Each should be evaluated for the least impact to the policyholder ie. Deductible, Policy Limits for Protection, Broadest coverage based on the facts of the event, Other insurance provisions Parker, Smith & Feek. All Rights Reserved. 7

8 Property Coverage Coverage could include stock. Usually coverage is from an external cause. As previously discussed, pollution exclusion likely. First party only Parker, Smith & Feek. All Rights Reserved. 8

9 Commercial General Liability CGL may provide coverage for damage to a 3 rd party in which the insured s product is incorporated if it causes damage (property damage and loss of use) Possible coverage for injury to 3 rd parties. Check exclusions specifically pollution exclusion. Will not provide coverage for recall of the insured s product or work Parker, Smith & Feek. All Rights Reserved. 9

10 Cargo or STP The Marine Stock Throughput Insurance Program is an all-inclusive Policy covering goods from the time an Assured assumes an interest in the goods until their interest ceases Parker, Smith & Feek. All Rights Reserved. 10

11 Definition of STP This insurance hereunder attaches from the time the subject matter becomes at the Assured s risk or the Assured assumes interest and continues while the subject matter is in Transit and / or in Store, on Exhibition or elsewhere, including while held as Stock and / or at the Assured s Stores and / or Outlets and / or in Consolidation / Deconsolidation Points and / or Processing. Assembly, Renovation and Repair whether or not in the due course of transit. All transits and stock can be insured for a Selling Price valuation under the STP. This accommodates any loss of profit in respect of goods in the current supply chain Parker, Smith & Feek. All Rights Reserved. 11

12 Perils Covered by a STP Policy can be All Risk as well as manuscripted to include specific perils that might affect the product, including change in temperatures, accidental damage by specific contaminates, etc. Against all risks of physical loss or damage to the subject-matter insured from any external cause, including the risks of spoilage and/or contamination Parker, Smith & Feek. All Rights Reserved. 12

13 Stock Throughput Policy Limitation the STP may contain a processing exclusion. May remove coverage for contamination that occurs during production. First party only. Valuation can be written on a selling price basis. Each STP needs to be reviewed thoroughly for limitations Parker, Smith & Feek. All Rights Reserved. 13

14 Recall & Accidental Contamination Most RAC policies contain a crisis response service. Requirement of the policy for the insured to use the crisis hotline. Use is not subject to the policy s SIR. But, crisis response is not official notice to the insurer. Notice to insurer needs to follow the notice provision of the policy Likely first discovered and reported within policy period Parker, Smith & Feek. All Rights Reserved. 14

15 Recall and Accidental Contamination Policies Provides first party coverage including: Recall Expenses Business Interruption Costs/Extra Expense Increased Cost of Working Rehabilitation Expenses Consultant Costs Adverse Publicity Usually contains coverage for malicious contamination/extortion. Policy can be endorsed for third party losses - Customer Loss of Profits (CLOP) Third Party Recall Liability (TPRL) Governmental Recall coverage. Product Refusal think of it as Collateral Damage coverage Parker, Smith & Feek. All Rights Reserved. 15

16 Practical Approach to Use of Policies Discussed Consider each policy and notice as required to maximize insurance recovery. Example Ammonia Escape at a third party facility Use of R&AC policy s crisis hot line for expert in dealing with the FDA and state authorities. (not subject to the SIR) Use of STP for surveyors to also work with regulators to agree to replacement of packaging only and for recovery of SIRs from the cold storage facility Parker, Smith & Feek. All Rights Reserved. 16

17 Thank You! PRESENTER: Ed Rhone Parker, Smith & Feek Parker, Smith & Feek. All Rights Reserved. 17

18 Strafford November 29, :00 p.m. 2:30 p.m. Insurance Coverage for Food Contamination and Recall Claims under CGL, Property and Contamination Policies Presenter: Joann M. Lytle, Esq

19 Product Contamination Policy Provides coverage for loss resulting from an Accidental Product Contamination first discovered during the Policy Period. Can also provide coverage for publicity of an actual or alleged Accidental Product Contamination. Product Contamination Policies generally provide first-party coverage. Third-party coverage is available via endorsement or through purchase of a separate recall policy. 19

20 Product Contamination Policy (con t) Accidental Contamination: Any accidental or unintentional contamination, impairment or mislabeling of an Insured product(s), which occurs during or as a result of its production, preparation, manufacture, packaging, or distribution; provided that the use or consumption of such Insured product(s): (i) (ii) has resulted in or would result in clearly identifiable internal or external physical symptoms of bodily injury, sickness, disease or death of any person(s) within one hundred and twenty (120) days following such consumption or use or has caused or would cause physical damage to or destruction of tangible property other than damage to or destruction of Insured product(s). 20

21 Product Contamination Policy (con t) Accidental Contamination: Error in the manufacture, production, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling (including instructions for use) of any Insured Products, or The introduction into an Insured Product of an ingredient or component that is, unknown to the Insured, contaminated or unfit for its intended purpose, or Error by the Insured in the storage or distribution of any Insured Products whilst in the care or custody of the Insured provided that the use or consumption of such Insured Products has led to or would lead to: i) bolding injury, sickness, disease or death of any person(s) or animal(s) physically manifesting itself within 365 days of use or consumption, or ii) physical damage to or destruction of tangible property (other than the Insured Products themselves. 21

22 Loss Covered Product Contamination Policies typically provide coverage for the following categories of losses: Pre-recall expenses, including chemical analysis of allegedly contaminated product; Recall costs Business interruption Rehabilitation Expenses Costs to re-establish the product to the projected level of sales or market share Extortion costs Costs paid in response to a demand made under threat to commit malicious tampering of a product Consultants costs 22

23 Loss Covered (cont.) May provide coverage for expenses sustained by Named Insured s customer: if Named Insured s product becomes an ingredient or component in a product manufactured, distributed, or handled by a customer of the Named Insured And the Named Insured is required to reimburse said customer Insurer s liability for customer s expenses will not exceed the expenses the Named Insured would have incurred in recalling the customer s products 23

24 Coverage Policyholder bears the burden of demonstrating: An accidental or unintentional contamination, impairment or mislabeling Of an Insured Product Which occurs during production, preparation, manufacturing, etc. Which has resulted or would result in bodily injury or clearly identifiable internal or external physical symptoms of bodily injury. 24

25 What Constitutes Contamination? Depending on the specific language of the insuring agreement, a recall based on the potential for contamination, without evidence that an insured s products were in fact contaminated, may not be sufficient to constitute contamination under the policies. See, e.g., Ruiz Food Prods., Inc. v. Catlin Underwriting U.S. Inc., No. 1:11-cv-00889, 2012 WL (E.D. Cal. Sept. 13, 2012); Little Lady Foods, Inc. v. Houston Cas. Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011). 25

26 What Constitutes an Error? Some policies require an error on the part of the policyholder to trigger coverage. In these cases, it is the policyholder s conduct during the manufacture, processing, preparation, assembly, blending, mixing, compounding, packaging or labeling of the product that a court considers. In Fresh Express Inc. v. Beazley Syndicate, 199 Cal. App. 4 th 1038 (Cal. Ct. App. 2011), the FDA issued an alert advising consumers not to eat bagged, fresh spinach because of risks associated with an E. coli breakout. This alert caused the policyholder to voluntarily recall its bagged spinach. Court determined recall was caused by FDA alert, not by policyholder error and coverage was not triggered. 26

27 What Constitutes an Error? (con t) In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd s, London, No. 1:14-cv-953, 2016 WL , in contrast, the Court agreed with the policyholder that there was an error as required by the accidental contamination insuring agreement where the policyholder failed to maintain an adequate pest control program and other sanitary controls. 27

28 Preventative Recalls As noted above, under the plain language of an accidental contamination policy, a policyholder may not have coverage for preventative recalls. In these cases, courts find that the policy only provides coverage for actual contamination not losses associated with the insured s belief that a product may be contaminated. See, e.g. Ruiz Food Prods., Inc. v. Catlin Underwriting U.S. Inc., No. 1:11-cv-00889, 2012 WL (E.D. Cal. Sept. 13, 2012) ( The Policy at issue, reasonably interpreted, does not cover losses incurred to prevent contamination. ). 28

29 Adverse Publicity Food contamination and recall events can result in costly adverse publicity Chipotle s recent E. coli outbreak impacted 14 states and 60 people this may seem relatively small given that there are nearly 2,000 Chipotle restaurants worldwide and some locations serve more than 300 customers an hour. Sales declined 14.6% in the last quarter of 2015, and declined 30% in December 2015 alone, representing an estimated $53 million in lost sales. Chipotle s stock fell from a high of $754 a share in August 2015 to a low of $404 in January Chipotle incurred significant costs in an effort to get customers back into restaurants, including increased and targeted marketing campaigns and promotional offers for free or discounted food. 29

30 Adverse Publicity (con t) Accidental Contamination Policy may provide coverage for losses resulting from Publicity implying accidental or unintentional contamination. Sample contamination policy defines Publicity as: The reporting of an actual or alleged Accidental Product Contamination during the Policy Period in local, regional, or national media (including but not limited to radio, television, newspapers, magazines or the Internet) or any governmental publication where the Named Insured s Product(s) and the Named Insured are specifically named. 30

31 Adverse Publicity (con t) An insured may have coverage for adverse publicity even where the insured s product does not sustain actual contamination if the publicity provision includes publicity related to an alleged accidental product contamination. See, e.g., Wornick Co. v. Houston Casualty Company, No. 1:11-cv , 2013 WL (S.D. Ohio 2013) (denying insurer s motion for summary judgment regarding coverage for adverse publicity losses where product was not contaminated but issues of fact remained as to whether there was an adverse publication). A product contamination policy may provide, as a part of Loss, Rehabilitation Expenses, including: Reasonable expenses necessarily incurred by the Named Insured to reestablish the reputation and the market share of the product line which has been the subject of an accidental product contamination. 31

32 Adverse Publicity (con t) Policyholder must check its contamination/recall policy s exclusions to determine whether coverage for adverse publicity exists. Some first-party recall policies contain exclusions for losses associated with the adverse publicity that may arise after a food recall or contamination event: This insurance does not apply to any loss, cost or expense arising out of, based upon, attributable to or involving directly or indirectly: A. Any adverse publicity 32

33 Third Party Coverage May be available by endorsement Policyholder may want to purchase a separate recall policy for third-party coverage. Third-party recall insurance provides: [W]e shall reimburse you for product recall liability damages resulting directly from a covered incident, provided (1) such covered incident takes place in the coverage territory, and (2) the initial oral or written publication of such covered incident takes place during the policy period. 33

34 A Covered Incident the recall, removal, recovery of possession or control, withdrawal or disposal of, or purposeful destruction of your product(s) from or by a distributor, purchaser, retailer, wholesaler, or user of your product(s) solely because the use or consumption thereof has resulted in bodily injury or property damage, or because the use or consumption thereof poses actual and imminent danger of resulting in bodily injury or property damage. 34

35 Product Recall Liability Damages Covered third-party recall damages: Any sums that you become legally obligated to pay as compensatory damages. Sums owed pursuant to contract of indemnity or contract of reimbursement May include business interruption, loss of reputation, lost profits, transportation and labor costs Review policy may not include liquidated or penalty damages Defense costs The recall policy may exclude coverage for costs incurred to replace the recalled product check policy endorsements to determine coverage for these costs 35

36 Common Exclusions Bodily Injury Bars coverage for bodily injury, emotional distress or mental anguish Property Damage Bars coverage for physical injury to or destruction of tangible property other than your product. 36

37 Other Noteworthy Exclusions There may be exclusions specific to products that are topical or ingestible Liability arising out of any pre-existing condition that insured knew of or reasonably should have known of prior to inception of policy Liability arising out of intentional acts or omissions that could reasonably be expected to lead to a covered incident 37

38 Joann M. Lytle Partner, Insurance Coverage Group McCarter & English LLP PRACTICE GROUP Insurance Coverage CONTACT Mellon Bank Center 1735 Market Street Suite 700 Philadelphia, PA EDUCATION Harvard Law School, J.D., cum laude, 1990 La Salle University, B.A., maxima cum laude, 1987 BAR ADMISSIONS Pennsylvania New York U.S. Court of Appeals, Third Circuit U.S. District Court, Eastern District of Pennsylvania U.S. District Court, Middle District of Pennsylvania U.S. District Court, Southern District of New York Joann Lytle helps corporate policyholders maximize their insurance assets and has recovered hundreds of millions of dollars for a wide range of companies, including those in the food services, manufacturing and health care industries. She has handled disputes involving commercial general liability, umbrella liability, errors and omissions liability, directors and officers liability, employment practices liability and cyber liability policies. In addition to representing policyholders in coverage disputes, Joann also provides insurance coverage advice and counseling to her clients on an ongoing basis. She graduated maxima cum laude from LaSalle University in 1987 and obtained her J.D., cum laude, from Harvard Law School in Business Insurance Magazine recognized Joann as one of its 2014 Women to Watch. In 2014, she was recognized by Chambers USA as a Leader in Their Field. Joann was selected as the exclusive Pennsylvania winner of the Lexology Client Choice Award in 2013 and Joann has also been recognized in Best Lawyers in America since

39 Strafford Publications, Inc. Seminar Live Webinar November 29, :00 2:30 pm Insurance Coverage for Food Contamination and Recall Claims under CGL, Property and Contamination Policies Presenter: Robert D. Chesler, Esq. (973)

40 Disclaimer The views expressed by the participants in this program are not those of the participants employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session v Anderson Kill P.C. All Rights Reserved.

41 Speaker Robert D. Chesler, Esq. Anderson Kill, P.C. (973) v Anderson Kill P.C. All Rights Reserved.

42 Peanut Corporation of America Owner knowingly shipped salmonella tainted peanuts 9 deaths, 714 ill 360 companies and 3900 products affected Owner sentenced to 28 years in prison v Anderson Kill P.C. All Rights Reserved.

43 1. NOTICE Give notice early and broadly Give notice of anything that even smells like it might be a claim Late notice can be fatal!!!! General liability (occurrence) vs. specialty policies (claims-made) v Anderson Kill P.C. All Rights Reserved.

44 2. Limits of liability Are they high enough? Damages are rising in food contamination cases Are you sharing your policy with additional insureds? v Anderson Kill P.C. All Rights Reserved.

45 3. General Liability Policy: What is Covered? Third party claims for: Bodily injury Property damage Personal and advertising injury (disparagement, copyright infringement, invasion of privacy, et al.) Does not cover economic loss Unlimited duty to defend v Anderson Kill P.C. All Rights Reserved.

46 4. General liability policy vs. product contamination policy Tangible damage vs. economic loss v Anderson Kill P.C. All Rights Reserved.

47 Occurrence Accident neither expected nor intended from the standpoint of the insured. Subjective standard Naumes, Inc. v. Chubb Custom Ins. Co., 2007 U.S. Dist. Lexis (M.D. Pa. 2008) Coverage where insured accidentally mixed ingredient containing banned product into final product v Anderson Kill P.C. All Rights Reserved.

48 5. What is Property Damage? Glorybee and Sokol Sokol & Co. v. Atlantic Mutual Ins. Co., 430 F.3d 417 (7 th Cir. 2005) individually wrapped packages of peanut butter placed in cookie mix box Security Nat. Ins. Co. v. Glorybee, 2011 U.S. Dist. Lexis (D.Or. 2011) peanuts incorporated into candy Shade Foods, Inc. v. Innovative Prod, Sales and Mktg., 93 Cal.Rptr. 2d (Ct.App. 2000) splinters in cereal boxes Silgan Containers Corp. v. National Union, 2010 US. Dist. Lexis (N.D. Cal 2010) Defective pull tabs v Anderson Kill P.C. All Rights Reserved.

49 Property Damage Phibro, Inc. v. National Union Fire Ins. Co., 446 N.J. Super. 419 (App.Div. 2016). Additive that kept chickens from gaining weight caused property damage v Anderson Kill P.C. All Rights Reserved.

50 Pollution Exclusion Original exclusion limited to environmental pollution. Now, much broader absolute exclusions exist See Pepsico, Inc. v. Winterthur Int l Amer. Ins. Co., 788 N.Y.S. 2d 142 (App. Div. 2004) pollution exclusion did not apply to non-environmental pollution faulty raw materials Cincinnati Ins. Co. v. Becker Warehouse, Inc., 635 N.W. 2d 112 (Neb. 2001) xylene fumes contaminated food in warehouse - excluded from coverage v Anderson Kill P.C. All Rights Reserved.

51 Your Work/ Your Product Exclusions Atlantic Mut. Ins. Co. v. Hillside Bottling Co., Inc., 903 A. 2d 513 (N.J. App. Div. 2006) Bottler mixed ingredients into bottled beverages, resulting in ammonia contamination. Court found that bottled beverages were bottler s product no coverage. See also, Nu-Pak, Inc. v. Wine Specialties Int l, Ltd., 643 N.W. 2d 848 (Wis. Ct. App. 2002) v Anderson Kill P.C. All Rights Reserved.

52 Number of Occurrences Republic Underwriters Inc. Co. v. Moore, 493 F. Appr. 707 (10 th Cir. 2012) Country Cottage prepared food in its facility People became sick at Country Cottage and at catered event Is there one occurrence for preparation of food? Two occurrences for two places where people became sick? Multiple occurrences an occurrence for each person who became sick? Court found one occurrence, which minimized coverage for insured Many courts nationally would have found either two or multiple occurrences. Number of occurrences issue affects structure of insurance program re: deductibles, aggregate limits, and batch clauses International Flavors & Fragrances, Inc. v. Royal Ins. Co., 844 N.Y.S. 2d 257 (App. Div. 2007) 30 claimants alleging popcorn lung 30 occurrences v Anderson Kill P.C. All Rights Reserved.

53 Property Insurance PBM Nutritionals v. Lexington Ins. Co., 72 U.S.E.2d 707 (Va. Supreme. Ct. 2012) No coverage for product contamination Leaking valve sent contaminated water to infant formula ingredients No coverage very broad pollution exclusion. Original policy would have provided coverage, but a total pollution exclusion added by endorsement negated it v Anderson Kill P.C. All Rights Reserved.

54 Property Insurance - Contamination Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281 (10th Cir. 2011): Contamination Exclusion was there third party damage to trigger property damage coverage. Contamination of cheese in warehouse Only covered if caused by 'other physical damage' Damaged fruit in warehouse contaminated cheese See also, Allianz Ins. Co. v. RJR Nabisco Holding Corp., 96 F. Supp. 2d 253 (S.D.N.Y. 2000) peril not otherwise excluded exception to exclusion v Anderson Kill P.C. All Rights Reserved.

55 Direct Physical Loss or Damage S. Wallace Edwards & Sons, Inc. v. Cincinnati Ins. Co., 353 F.3d 367 (4th Cir 2003) exposure to ammonia caused odor and color change Gerawen Farming Partners, Inc. v. Westchester Surplus Lines Ins. Co., 2008 U.S. Dist. Lexis 4511 (E.D. Cal.2008) pitting of nectarines Source Food Technology, Inc. v. United States Fidelity and Guaranty Co., 465 F. 3d 834 (8th Cir. 2006) mad cow disease in Canada caused ban on beef imports; company couldn t import beef tallow no physical damage v Anderson Kill P.C. All Rights Reserved.

56 Practice Pointers Use an insurance broker who has expertise in food insurance. Review your exposures Cooperate with your insurance company, but protect your interests. Do not take CLAIM DENIED as an answer from your insurance company v Anderson Kill P.C. All Rights Reserved.

57 Thank You Robert D. Chesler, Esq. Anderson Kill, P.C. (973) v Anderson Kill P.C. All Rights Reserved.