When food producers and distributors are faced with a product recall, one of the most common questions is: How soon, if at all, do you report the claim to your insurance company? The answer is simple—you should be reporting those claims as soon as possible. Otherwise, you face the possibility of having your insurance company deny the claim for failure to provide timely notice.
Let’s suppose that you have just been made aware that a number of consumers are claiming that they suffered bodily injuries as a result of eating food that you manufactured or distributed. Like any responsible company, you first want to investigate to determine whether there is any merit to the claims. You also may want to alert your wholesale distributors of a potential problem. You may even want to bring in outside experts to help you determine the existence and scope of any problem. This will likely take hours, if not days, to complete. Assuming that you have product liability coverage under your commercial liability policy—and recall insurance and business interruption coverage—how soon should you alert these insurance companies of the problem?
Keep in mind that some insurance policies are sold on what is called an "occurrence" form, while others are sold on a "claims-made" form. You may be able to tell the difference by looking at the first page of the declarations or of the actual policy, which sometimes identifies a policy as a "claims-made" type of form. A good rule of thumb is that general liability policies are usually "occurrence" policies; while recall coverage is often written on "claims-made" forms. What’s the difference? Most "claims-made" policies require notice as soon as you believe there is a problem that may trigger coverage, even before any formal claim is asserted. Furthermore, failure to report the claim in a timely manner can result in denial of coverage—even for an otherwise covered loss. Courts look at the circumstances of each case to determine what is reasonable notice, but a good rule of thumb when no specific number of days is provided is to provide notice within twenty to thirty days. The notification period for occurrence based policies is more forgiving. They too require prompt notice, but an insurance company has to show that it was prejudiced by any delay in notice in order to deny coverage on that basis.
Therefore, under the scenario above, when should you report the claim? It is our recommendation that you report the claim to your insurance company within twenty-four to forty-eight hours of becoming aware of the potential claim for food liability. In fact, you should put both your commercial liability carrier and any recall carrier on notice almost immediately. There is no reason to wait to determine whether there is an actual claim. Simply reporting a claim will not result in your insurance premiums increasing or have an adverse impact on your premium ratings. Claims can only have a negative effect on your coverage or premium rates if they turn out to be viable, and the insurance company has to pay a claim on your behalf, or at a minimum, must set a reserve for the claim. Accordingly, there are no negative results from reporting a claim to the insurance company as soon as you suspect that coverage might be triggered, but there are potential negative consequences if you don’t.