Berries. Walnuts. Wholesome. Healthy. But not when they may be contaminated with harmful bacteria. On May 10, 2016, grocery store chain Publix announced a voluntary recall of its cranberry nut and seed mix. Publix learned of the potential listeria monocytogenes contamination when it received notice from its supplier, Woodstock Farms. Although there are no reported cases of illness, Publix proactively pulled the mix from stores in six southeastern states and offered a full refund to consumers.

Publix’s recall insurance policy may provide protection for this event. That policy potentially can cover quite a bit of ground. But for the unwary, there is likely to be ground that is bare (of insurance). We start with the premise that an insured event has occurred; i.e., there has been an instance of covered product contamination, and you, the insured, have taken steps to minimize the loss and respond to applicable requirements, including initiating a recall.

The first item to consider is the scope of the recall. Your testing indicates contamination in Batches 542 and 643. Can you assume contamination in each of the batches in between? What about Batches 541 and lower and 644 and higher? More importantly, what does your policy say about the parameters of the “covered incident”? Common policy language often requires actual bodily injury or property damage as a result of the contaminated product, or “actual and imminent danger” of such injury and damage from the product. The insurer may argue that “good practice” or “prudence” does not trigger coverage. Thus, the recoverable costs associated with the recall of contaminated Batch 542 may not be recoverable costs with respect to indeterminate Batch 541.

What kinds of costs are we talking about? An insured frequently will incur the following costs, among others:

• notification costs about the incident, such as through advertisements, mailings, the Internet and social media;
• transportation and handling costs to bring the recalled products back to you (or is it to the disposal site or somewhere else?);
• costs to dispose of or destroy your product (is it your choice to incinerate [expensive], or is the only approved option landfilling [less expensive]?);
• costs to destroy marketing materials, including point-of-sale materials;
• costs for additional warehouse or storage space (is that your space, or your distributors’ or your customers’ space?);
• additional personnel costs (can you use your own employees, or are outside contractors required?);
• additional costs of transportation, accommodation, etc., for any additional personnel;
• independent crisis management, security, or public relations consultants or advisors (do such need preapproval, and does approval have to wait until acceptance of coverage?); and
• costs of inspection and analysis to determine the scope and source of the contamination.

Whose expenses are covered? Are only your expenses covered, or will your distributors’ and customers’ expenses be reimbursed? A policy that expressly extends coverage to you and your distributors is great, but by implication may be deemed not to extend to the costs of your customers.

Less frequently covered, but absolutely essential to consider, are the expenses, if any, necessary to protect the brand. It may be that only Batches 542 and 643 are documented as contaminated, but to avoid any doubt that the All-Star Seed ’n’ Nut Mix in the marketplace is contamination-free, you may conclude that brand protection necessitates the recall and destruction of all mix with “use by” dates of August 7 through August 30, 2016 (as Publix did). Will your policy pay for that? Further, if you can document a reduction in sales following the numerous news reports about the incident, is that loss of income covered? How long does coverage for brand damage extend?

Applicable to all these expenses will be some qualification like “reasonable and necessary.” The critical question of course is: from whose perspective? If spoiled lettuce is customarily composted, will your insurer nevertheless agree that it is reasonable and necessary to incinerate contaminated lettuce?

Equally applicable to these expenses will be the policy’s limits, sublimits, deductibles and/or self-insured retentions. It does little good to have carefully negotiated the terms of coverage only to find out that you did not buy enough coverage or that the carrier’s obligation arises only after you have carried the bulk of the loss. Likewise, be aware of and understand any coinsurance requirement, where you are insuring a portion of the loss even when you are above your SIR or deductible.

Insureds should take note of the exclusions for specific kinds of expenses. A frequent exclusion bars recovery of expenses addressed to repair, recondition, decontaminate or otherwise treat the recalled product. Query a recall for prepackaged lunches containing contaminated trail mix and whether any recovery can be obtained for extracting the salami, cheese, crackers and beverage, and discarding the contaminated mix with the packaging. Indeed, some policies preclude any coverage where your product is included as a component in someone else’s product. Whether, in this example, you are salvaging the non-contaminated items (covered) or repairing the contaminated lunch (uncovered) will be a critical determination.

Another potentially uninsured event is one in which your product is caught up in the public furor over someone else’s contaminated product. Who pays when Happy All-Star Farms is the source of a competitor’s contaminated spinach and, as a precaution, you recall all of the Happy All-Star Farms arugula, lettuce and chicory in your distribution chain?

Recalls all too frequently occur and will remain common in the food sector. Policyholders must be aware up front of the limitations in their recall policies and be willing to challenge their insurers both during the application process and if the recall event occurs.