Food Recall Events: The Importance of Evaluating Your Insurance Coverage Before a Voluntary and Mandatory Food Recall

by McCarter & English, LLP
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Food recalls are on the rise as consumer protection regulations become more stringent, and they can be costly events. There can be significant expenses associated with removing impacted products from stores; reimbursing wholesalers, distributors and retailers; advertising the launch of a recall; collecting recalled products; issuing refunds and product replacements to consumers; defending and paying claims by those allegedly injured; and, collecting and disposing of recalled product. Food recalls also disrupt business operations, and are damaging to companies’ reputations.

Several large-scale food recall events have recently made headlines. General Mills is now voluntarily recalling approximately 1.8 million boxes of original and Honey Nut Cheerios after discovering wheat flour was introduced into its gluten-free oat system at a California production facility. General Mills has asked consumers to return for refund or replacement potentially impacted boxes of cereal. It removed all unsold boxes of the impacted cereal from store shelves. General Mills also has implemented protocol changes at its production facilities to avoid future issues.

Not all recalls are voluntary, as was the case with General Mills. The Food and Drug Administration (“FDA”) has authority to order mandatory food recall events as part of the Food Safety and Modernization Act of 2011 (“FSMA”). Indeed, the FDA recently issued its “Draft Guidance for Industry: Questions and Answers Regarding Mandatory Food Recalls,” explaining its view of its increased authority in the food recall arena. According to the FDA, it may order a company to recall food products if it determines that there is a reasonable probability that a food product is adulterated or misbranded, and that the use of or exposure to the product will cause serious adverse health consequences or death to humans or animals.

Despite the likelihood of, and substantial costs involved in, a product recall, many companies do not have adequate insurance for such events. A company may believe a recall event is unlikely. It may hope to rely on its commercial general liability policies or its property insurance policies if involved in a recall, unaware of the potential exclusions on which insurers may rely following a recall event. Those companies buying product recall coverage for consumable products may not appreciate the scope of available insurance, and how it may be maximized to respond to a recall event. Companies also may be unaware of limitations and potential gaps in coverage for their lost profits, business interruption, recall expenses, investigative costs, and rehabilitation expenses, all of which can be addressed at the time of renewal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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