Preemptive recalls may not be covered by product recall insurance
With regulatory standards and product safety rules becoming more stringent, companies are required to perform a significant amount of testing to ensure that the products they put into the marketplace are safe for public consumption. The increase in regulations has also given rise to the need for, and availability of, product recall insurance policies. But, when a company chooses to preemptively recall a product without actual evidence of contamination, product recall insurance may not cover the company’s resulting loss.
Product recall coverage
Product recall policies typically contain two coverage parts; coverage for losses that are the result of accidental contamination and coverage in connection with a governmental recall. Each coverage part requires the policyholder to establish that there was a potential for bodily injury or property damage arising out of the use or consumption of its products. Essentially, the insured must show that its product is contaminated.
Insurance coverage disputes arise when a policyholder voluntarily recalls its products without first obtaining proof that its products were contaminated. Policyholders argue that such preemptive recalls are not only appropriate, but are necessary to mitigate their covered loss. In response, insurers maintain that their policies do not cover voluntary recalls that have no direct relation to public health hazards and that such expenses should remain part of an insured’s cost of doing business.
Courts look for proof of contamination
In this context, courts have based their decision on whether there is proof that the subject products were actually contaminated. For example, in Ruiz Food Products, Inc. v. Catlin Underwriting U.S., Inc., No. 1:11-CV-00889-BAM, 2012 WL 4050001 (E.D. Cal. Sept. 13, 2012), aff’d sub nom. Ruiz Food Products, Inc. v Catlin Syndicate Ltd., 588 Fed. Appx. 704 (9th Cir. 2014), the court denied coverage in connection with a recall of Tornados, a ready-to-eat product similar to burritos, sold by Ruiz Food, because there was no evidence of contamination. The Tornados included a beef spice mix, which was produced by Ruiz Food’s supplier, Superior Quality Foods. The beef spice mix, in turn, contained hydrolyzed vegetable protein (“HVP”) which was manufactured by Basic Food Flavors. In February 2010, while FDA inspectors were conducting testing at Basic’s facilities, a sample from a finished lot of HVP tested positive for salmonella. This lot was not sent to Superior and, thus, never reached Ruiz Food. After the positive test, however, Basic and Superior issued a recall that extended to HVP. Ruiz Food also issued a recall of its Tornados due to potential salmonella contamination. Ruiz Food then made a claim under its product recall insurance policy. Despite extensive testing, none of the Tornados ever tested positive for salmonella. When faced with the issue of whether Ruiz Food’s voluntary recall was covered by its insurance policy, the court explained that “[t]he potential to cause injury” does not “alter the requirement of showing that the contamination or impairment is actually present.” Therefore, because there was no evidence that the Tornados were contaminated, Ruiz Food was not entitled to coverage in connection with the recall.
A similar situation was addressed in Little Lady Foods, Inc. v. Houston Casualty Co., 819 F. Supp. 2d 759 (N.D. Ill. 2011). Little Lady Foods was informed that a recent batch of its product contained a bacteria within the listeria genus. The listeria genus includes seven strains of bacteria, including listeria innocua, listeria seeligeri, listeria welshimeri, listeria ivanovii, listeria grayi, listeria murrayi, and listeria monocytogenes (“LM”). Of these strains, only LM is likely to cause bodily injury. Nonetheless, Little Lady Foods notified the USDA and its customers that it would be placing 57,374 cases of its product on hold because of the presence of bacteria. Little Lady Foods then sought coverage from Houston Casualty under the Accidental Product Contamination section of its insurance policy. In response, Houston Casualty took the position that in order to be entitled to coverage, the product must test positive for LM, the one strain within the listeria genus that is likely to cause bodily injury. After subsequent testing revealed that the product did not contain LM, Houston Casualty denied coverage. Ultimately, the court agreed with Houston Casualty’s decision because “harm to consumers was neither probable nor possible in this situation.” The court further stated that “[t]he fact that Little Lady bore some costs as a result of its fear of contamination does not mean those costs are losses covered by the policy.” See also Wornick Co. v. Houston Cas. Co., No. 1:11-CV-00391, 2013 WL 1832671 (S.D. Ohio May 1, 2013) (because there was no evidence the products came into contact with salmonella, they were not “contaminated” under the policy).
Results obtained from testing of recalled products are critical to the resolution of insurance disputes in the product recall realm. Even if a company determines that a recall is necessary, the resulting costs may not be absorbed by insurance unless evidence demonstrates actual contamination.