This document provides an overview of food and consumer product recalls from an insurer's perspective. It discusses the common types of recalls, how they are initiated, potential areas of damages in recall cases, managing third party claims, pursuing recoveries from upstream suppliers, and analyzing coverage under first party insurance policies like product withdrawal and contamination policies. Key topics include determining what constitutes a covered recall or occurrence, addressing common coverage defenses, establishing liability in tort or contract, and handling damages issues. Court cases are referenced throughout regarding the interpretation of policy terms.

1. Food & Consumer Product Recalls:Food & Consumer Product Recalls:
An InsurerAn Insurer’’s Perspectives Perspective
Paul Bellin, Royal & SunAlliance Insurance Agency
Bary Gassman Esq., Asperger Associates LLC
Stephen Gregoire CPA/CFF, Meaden & Moore
April 16 & 18, 2012

2. What Do All These Products Have in Common?What Do All These Products Have in Common?
2

3. Learning ObjectivesLearning Objectives
Respond to recalls impacting insureds, including
claims presented by the insureds' downstream
customers
Take effective steps to protect the insureds' brand
and proprietary information
Protect subrogation rights in recall cases to obtain
the best possible recovery outcome
Evaluate and overcome coverage defenses which are
frequently raised by liability insurance providers in
recall cases
3

4. Types of RecallsTypes of Recalls
• Food & Drug Administration (FDA)
– Class I
– Class II
– Class III
• Consumer Product Safety Commission (CPSC)
– Class A
– Class B
– Class C
• United States Department of Agriculture (USDA)
– Class I
– Class II
– Class III
4
Source: www.fda.gov
Source: www.cpsc.gov
Source: www.fsis.usda.gov

5. Recall InitiationRecall Initiation
FDA & USDA recalls are almost always
voluntary
◦ Both have the authority to request or enforce
recalls
CPSC recalls are initiated by the
manufacturer and are required by law to
notify the CPSC upon discovery of a
defect
5

6. Recall Notice / Potential DefectRecall Notice / Potential Defect
Examples of Recall Notices (See Handout)
Scope of the recall & impact to your insured
◦ How many customers?
◦ How many products?
Objective: Manage & limit the exposure
Assembling your team
6

7. Hypothetical Supply ChainHypothetical Supply Chain -- FoodFood
7
Tomato Grower
Pizza Sauce
Manufacturer
Frozen Pizza
Manufacturer
Wholesale
Distributor
Retail OutletConsumer
Where does your Insured fit in?

8. Claims from 3Claims from 3rdrd
PartiesParties
• Where do the claims originate from?
• Initial documentation
– Affidavits (See Handout)
– Questionnaires (See Handout)
– Visual Documentation / Sample Retention
• Business relationships
– Insured and customers
– Insured and Insurers
8

9. Tips for Managing 3Tips for Managing 3rdrd
Party ClaimsParty Claims
Create a master tracking spreadsheet
Discuss with the entity originating the
claim
◦ Not always the insured’s customer
Keep your insured in the loop
9

10. Tracking SpreadsheetTracking Spreadsheet
10

11. Tracking SpreadsheetTracking Spreadsheet
11

12. Potential Areas of DamagesPotential Areas of Damages
• Third-Party Claims
– Credits for destroyed or
damaged finished goods from
customers’ customers
– Recall penalties and fines
– Customers Finished Goods &
Disposal Cost
– Labor Cost
– Freight & Storage Fees
– Lost Profits
• Insured’s Claims
– Replacement cost of damaged
product
– Extra expense
– Storage & Disposal fees
– Recall assistance
– Lost profits
– Brand/Reputation Rehabilitation
12

13. ““Snowball EffectSnowball Effect”” of Damagesof Damages
13
Tomato Grower
Pizza
Sauce #1
Pizza
Sauce #2
$0.50 per
lb
Frozen
Pizza #1
Frozen
Pizza #2
Frozen
Pizza #3
Frozen
Pizza #4
$1.00 per
lb
$1.00 per
lb
4 Frozen Pizzas
@ $3.00 / Pizza
1 2 3 54
4 Frozen Pizzas
@ $3.00 / Pizza
6 7 8 9 10 11 12
Thousands of Retailers
Millions of Consumers
$3.50 /
Pizza
$4.50 / Pizza

14. Sensitive Areas of DisputeSensitive Areas of Dispute
• Incremental vs. allocation of normal costs
• Duplications
• Lost profits / Business Interruption
• Recall related cost
14

15. Disposal of ProductsDisposal of Products
Salvage
Brand Protection
Coordination of disposal
Creative Solutions
15

16. ConfidentialityConfidentiality
Examples
Important Features
16

17. SettlementsSettlements
Managing Business Relationships
Compromising Unsubstantiated claims
Recovery from Upstream Supplier
17

18. FirstFirst--Party CoverageParty Coverage
PRODUCT WITHDRAWAL/RECALL
INSURANCE
ACCIDENTAL CONTAMINATION,
MALICIOUS TAMPERING AND
PRODUCT EXTORTION INSURANCE
18

19. Sample Product Withdrawal / RecallSample Product Withdrawal / Recall
ProvisionProvision
We will reimburse you for “product
withdrawal expenses” incurred by you
because of a “product withdrawal” to
which this insurance applies.
Insurance only applies to a “product
withdrawal” if it is initiated because:
◦ You determine that the “product withdrawal”
is necessary; or
◦ A government entity has ordered you to
conduct the “product withdrawal.”
19
Source: ISO Properties, Inc

20. What Expenses are Covered?What Expenses are Covered?
Can include:
◦ Replacing or repairing the defective product;
◦ Notifications or announcements regarding recall;
◦ Shipping the recalled product from the purchaser or user;
◦ Overtime to non-salaried employees;
◦ Hiring of independent contractors and consultants;
◦ For communications such as TV and radio
announcements;
◦ Storage and warehouse space;
◦ Disposal costs for “your products” or products that
contain “your products”;
◦ In some cases, lost profit resulting from the recall.
20

21. Is it a Covered Recall?Is it a Covered Recall?
Not all recalls are covered
Terms of the policy will dictate
Examples of recalls that typically are not
covered are those initiated due to:
◦ The failure of the product to serve its intended
purpose, including breach of warranty of fitness or
performance;
◦ Deterioration or decomposition of the product;
◦ Expired shelf-life;
◦ Known defect prior to time product leaves your
control;
◦ Recalls initiated due to copyright or trademark
infringement.
21

22. Sokol and Co. v. Atlantic Mutual Ins. Co., 430
F.3d 417 (7th Cir. 2005)(Illinois Law)
◦ “Covered Recall” defined by policy as a “recall made
necessary because the insured or a government body has
determined that a known or suspected defect, deficiency,
inadequacy or dangerous condition in ‘your product’ has
resulted in or will result in ‘bodily injury’ or ‘property
damage.’”
◦ Court interpreted this to mean that coverage was limited
to recalls initiated by the insured or a government body.
◦ Coverage did not exist where insured’s customer initiated
the removal and replacement of the insured’s product.
22

23. Sample AccidentalSample Accidental
Contamination ProvisionContamination Provision
Reimburses insured for “losses” arising out of
Insured Events where the losses are due to:
“Accidental Contamination.”
“Accidental Contamination” defined: Error by the
insured in the manufacture, …processing,
…packaging of any Insured Products…which
causes the Insured to have reasonable cause to
believe that the use or consumption of such
Insured Products has led to or would lead to:
◦ 1) bodily injury, sickness, disease or death of a person
or animal; or
◦ 2) physical damage to or destruction of tangible
property.
23
Source: ISO Properties, Inc

24. Covered ExpensesCovered Expenses
Can include:
◦ Recall Expenses
◦ Product Rehabilitation Costs
◦ Gross Profits
◦ Crisis Response and Consultant Expenses
24

25. Recent Court DecisionsRecent Court Decisions
Fresh Express Inc. v. Beazley Syndicate, 2011
WL 3949805 (Cal.App.6th 2011)
E. Coli outbreak was not an error by the insured, therefore, no
coverage
Caudill Seed & Warehouse Co., Inc. v.
Houston Casualty Co., 2011 WL 6370366
(W.D. Ky. 2011)
No coverage because source of contamination was not the
insured’s facility.
25

26. Recent Court Decisions (contRecent Court Decisions (cont’’d)d)
Little Lady Foods v. Houston Casualty, 2011
WL 4473517 (ND ILL 2011)
Insured’s belief that product might contain a harmful strain of
bacteria not enough to establish coverage. Policy does not cover
costs for contamination prevention.
The Limited v. Cigna Ins. Co., 228 F.Supp.2d
574 (E.D.Pa. 2001) (Affirmed on Appeal)
No coverage existed where insured could not prove actual
contamination of the product, despite FDA agreement with recall.
26

27. Recovering Against UpstreamRecovering Against Upstream
Manufacturers and SuppliersManufacturers and Suppliers
Theories of Liability-
◦ Breach of Contract
◦ Breach of Warranty
◦ Negligence
◦ Strict Product Liability
27

28. Breach of ContractBreach of Contract
Is there a written contract between insured and
manufacturer or supplier?
Possible terms regarding product quality and types of
damages recoverable
Examine purchase orders – acceptance of order
constitutes acceptance of purchaser’s terms
Terms may include an indemnification clause, or
confirm the types of recoverable damages
Beware of limitations written into contracts
28

29. Breach of WarrantyBreach of Warranty
Two Forms:
Express –
◦ Supplier expressly guarantees that a product is
not defective, or will perform in a certain way
Implied-
◦ Operates by law, even in absence of express
warranty
◦ Commonly found in Uniform Commercial Code
29

30. Uniform Commercial CodeUniform Commercial Code
Implied Warranty of Merchantability
◦ To be merchantable, goods must, among
other things:
Pass without objection in the trade;
Be of fair average quality
Be fit for ordinary purpose for which the goods are
used (i.e., food must be fit for consumption)
Implied Warranty of Fitness for Particular
Purpose
30

31. HypotheticalHypothetical
Insured purchased a component for one of
its products through a distributer, or
middleman.
Component later recalled by the company
that made it, causing insured to sustain
extensive damages while implementing its
own recall.
Can insured recover under breach of
implied warranty theory against
manufacturer?
31

32. NegligenceNegligence
Duty
Breach of duty
Causation
Damages
Must prove negligent acts and that the negligent acts
caused damages
32

33. Strict Product LiabilityStrict Product Liability
Look to the statutory requirements in forum state
Typically:
◦ Product is defective (manufacturing, design, inadequate
warnings)
◦ Defective condition made product “unreasonably dangerous”
◦ Defective condition existed when it left the manufacturer’s
control
◦ Product reached the user without substantial change
◦ Defective condition caused the damages
Eliminates the requirement of proving specific acts of
negligence
33

34. Defenses to Tort ClaimsDefenses to Tort Claims
Economic Loss Doctrine
◦ One of the most common defenses to tort-based product
liability claims
◦ Court-created legal doctrine exists in one form or another in
most jurisdictions
Application varies from state to state
Primary exceptions to application-
◦ Where the product defect causes bodily injury
◦ Where the product defect causes damage to property other than
the product itself
34

35. CompareCompare
Wausau Tile, Inc. v. County Concrete Corp., 593 N.W.2d 445
(Wisconsin 1999)
◦ Integrated system test
◦ Expectations of the parties
Travelers v. Damman & Co., 594 F.3d 238 (3d Cir. 2010)(NJ)
◦ Sophisticated companies should protect themselves through
contract remedies
35

36. Upstream Recoveries AgainstUpstream Recoveries Against
CGL PoliciesCGL Policies
CGL policy typically provides:
◦ Insurer “will pay those sums that the insured
becomes legally obligated to pay as damages
because of ‘bodily injury’ or ‘property
damage’ to which the insurance applies.”
Only applies if:
◦ “The ‘bodily injury’ or ‘property damage’ is
caused by an ‘occurrence’ that takes place in
the ‘coverage territory.”
36
Source: ISO Properties, Inc

37. Common Policy DefensesCommon Policy Defenses
No “Occurrence”
No “Property Damage”
Damage to “Your Product” Exclusion
Damage to “Impaired Property/Property
Not Physically Injured” Exclusion
“Recall of Products, Work or Impaired
Property” Exclusion
“Contractual Liability” Exclusion
“Communicable Disease” Exclusion
37

38. ““OccurrenceOccurrence”” IssuesIssues
“Occurrence” means an accident,
including continuous or repeated
exposure to substantially the same
general harmful conditions.
38
Source: ISO Properties, Inc

39. 39
Was There anWas There an ““OccurrenceOccurrence””??
United National Ins. v. Faure Bros., 949 N.E.2d 1185
(Illinois 2009)
o Mislabeled Chemical Bottles: Inquiry is not whether the acts were
performed intentionally, but whether the injury was expected
or intended.
Amerisure Mut. Ins. V. Hall Steel Co., 2009 WL 4724303
(Michigan 2009)
o Steel Wiper Brackets: When defective part is incorporated into
larger product which causes the product to become useless,
damages are caused by an “accident.”
Travelers v. Damman & Co., 2008 WL 370914 (NJ 2008)
o Vanilla Beans: Distinguish between purely contract damages and
tort-related damages.

40. 40
How ManyHow Many ““OccurrencesOccurrences””??
Why is this important?
Three schools of thought:
◦ Each individual claimant’s injury is an occurrence;
◦ The manufacture/sale of defective products
constitutes an occurrence – see in cases where
products contain asbestos;
◦ Where many individuals injured through exposure at
same time & place, there is one occurrence.

41. 41
Republic Underwriters Ins. v. Moore,
2010 WL 4365566 (ND Oklahoma)
◦ Restaurant/Catering: Acts constituting the
“occurrence” must fall within same temporal
& spatial parameters.
Bausch & Lomb, Inc. v. Lexington Ins.,
414 Fed. Appx. 366 (2d Circuit 2011)
◦ Contact Lens Solution: Incident giving rise to
liability is the claimants’ exposure to the
product, not the insured’s sale of the product.

42. 42
Where Was theWhere Was the ““OccurrenceOccurrence””??
ACE American Ins. Co. v. RC2 Corp.,
600 F.3d 763 (7th Circuit 2010)
◦ Lead in “Thomas the Train” toys.
◦ The “cause theory” not applied to determine
where an “occurrence” takes place.
◦ “Occurrence” that triggers coverage takes
place where the actual event that inflicts the
harm takes place.

43. NoNo ““Property DamageProperty Damage””
“Property Damage” means:
◦ Physical injury to tangible property, including
all resulting loss of use of that property.
or
◦ Loss of use of tangible property that is not
physically injured.
43
Source: ISO Properties, Inc

44. 44
Hamilton Die Cast v. U.S. Fidelity &
Guaranty, 508 F.2d 417 (7th Cir.
1975)
◦ Tennis Racket Frames: Where no physical harm
to other parts of finished goods, no “property
damage” exists.
Aetna Life & Cas. v. Patrick Industries,
645 N.E.2d 656 (Ind. 1995)
◦ Camper Furniture: “Property damage” requires
more than mere diminution in value; need
physical injury.

45. 45
Contrast with…
Imperial Cas. & Indemnity v. High Concrete
Structures, 858 F.2d 128 (3d Cir. 1988)
◦ Steel Washers: Where product is made into
something new with greater value than the product
supplied by the insured, damage was to more than
just the insured’s product.
Shade Foods v. Innovative Product Sales, 78
Cal.App.4th 847 (Cal. 2000)
◦ Almonds: “Property damage” exists “where a
potentially injurious material in a product causes loss
to other product with which it is incorporated.”

46. Damage to Your ProductDamage to Your Product
“Property damage” to “your product”
arising out of it or any part of it.
“Your product” means:
◦ a. Any goods or products, other than real
property, manufactured, sold, handled,
distributed or disposed of by:
(1) You;
(2) Others trading under your name; or
(3) A person or organization whose business or
assets you have acquired….
46
Source: ISO Properties, Inc

47. 47
Tradin Organics USA v. Maryland Cas.
Co., 325 Fed.Appx. 10 (2d Cir. 2009)
◦ “Intended to exclude coverage for damage to
the insured’s product, but not for damage
caused by the insured’s product to…property
other than the insured’s own product.”

48. Damage to Impaired Property/Damage to Impaired Property/
Property Not Physically InjuredProperty Not Physically Injured
This insurance does not apply to:
“Property damage” to “impaired
property” or property that has not been
physically injured, arising out of:
A defect, deficiency, inadequacy or
dangerous condition in “your product” or
“your work.”
48
Source: ISO Properties, Inc

49. “Impaired property” means tangible
property, other than “your product” or
“your work”, that cannot be used or is less
useful because:
◦ It incorporates “your product” or “your work”
that is known or is thought to be defective,
deficient, inadequate or dangerous;
If such property can be restored to use by
the repair, replacement, adjustment or
removal of “your product” or “your
work”…
49
Source: ISO Properties, Inc

50. 50
Sokol & Co. v. Atlantic Mutual Ins.
Co., 430 F.3d 417 (7th Cir. 2005)
◦ Removal and replacement of rancid peanut
paste packets subject to impaired property
exclusion.

51. Recall of Products, Work orRecall of Products, Work or
Impaired PropertyImpaired Property
The “Sistership” exclusion
Damages claimed for any loss, cost or expense incurred
by you or others for the loss of use, withdrawal, recall,
inspection, repair, replacement, adjustment, removal or
disposal of:
◦ “Your product”
◦ “Your work”; or
◦ “Impaired property”;
If such product, work, or property is withdrawn or
recalled from the market or from use by any person or
organization because of a known or suspected defect,
deficiency, inadequacy or dangerous condition in it.
51
Source: ISO Properties, Inc

52. Forest City Dillon, Inc. v. Aetna Cas. &
Surety, 852 F.2d 168 (6th Cir. 1988)
◦ “[W]hile [the insurers] intended to pay for
damages caused by a product that failed, they
did not intend to pay for the costs of recalling
products containing a similar defect that had
not yet failed.”
52

53. Contractual LiabilityContractual Liability
53
“Bodily injury” or “property damage” for which
the insured is obligated to pay damages by
reason of the assumption of liability in a
contract or agreement. This exclusion does
not apply to liability for damages:
◦ That the insured would have in the absence of the
contract or agreement; or
◦ Assumed in a contract or agreement that is an
“insured contract”, provided the “bodily injury” or
“property damage” occurs subsequent to the
execution of the contract or agreement…
Source: ISO Properties, Inc

54. Communicable DiseaseCommunicable Disease
Exclusion typically provides:
◦ This insurance does not apply to bodily injury or
property damage arising out of the transmission or
alleged transmission of any communicable disease.
54
Source: ISO Properties, Inc

55. Upheld in cases involving food. See Burlington Ins. Co.
v. Kloesel’s Steakhouse and Bar, S.D. Texas, Civil
Action V-98-100 (Hepatitis A).
Other cases discussing exclusion:
◦ Koegler v. Liberty Mut. Ins. Co., 623 F.Supp.2d 481 (N.Y.
2009)(humanpapillomavirus)
◦ Alexis v. Southwood Ltd. Partnership, 792 So.2d 100 (La.
2001)(exposure to contaminated soil, air & water)
All have in common: Plaintiff became ill or
contracted a disease
55

56. Does It Apply If Nobody Gets Sick?Does It Apply If Nobody Gets Sick?
Assume the following facts:
◦ A raw ingredient producer sells dried milk products to its
commercial customers which are later recalled because
they are contaminated with a harmful strain of Listeria.
◦ Customers assert claims alleging damage to their finished
goods, disposal costs, and other charges relating to their
own recalls of products.
◦ Ingredient producer seeks coverage for customer claims.
Would you deny coverage pursuant to the
Communicable Disease exclusion?
56

57. Exclusion recently tested in different venues in
the context of food recall claims where only
property damage was asserted. See also Camden
Fire Ins. Ass’n v. Mincing Trading Corp., New
Jersey.
Policies typically do not define the terms
“communicable disease” or “transmission”
leaving those to be interpreted by the court.
Overcoming the exclusion
57

58. Impact of Large Scale RecallsImpact of Large Scale Recalls
“Snowball” effect causing massive losses downstream
Manufacturers:
◦ Financially incapable of responding to claims
◦ Must respond to lawsuits across the U.S.
◦ Face bankruptcy and liquidation
Insurers:
◦ Defense costs
◦ Uncertain coverage determination
◦ Potential bad faith claims
58

59. Recent Approach to ResolutionRecent Approach to Resolution
Plainview Milk Products Cooperative Case
2009: recall of various milk products sold to commercial customers due to
potential Salmonella contamination.
◦ 21 direct customers and 189 downstream customers impacted
Multiple lawsuits were initiated around the country.
Claims totaling more than $31,000,000.
CGL policy provided coverage of $500k per occurrence & $2M aggregate.
Excess policy with $5M limit.
Insurer defended but denied indemnity based on recall exclusion, impaired
property exclusion, and pollution exclusion; also claimed that only one policy
year implicated.
Defendants, insurers and claimants all came to the table in one setting.
85% of the total claims asserted against Plainview were resolved within the
policy limits and without forcing Plainview into bankruptcy.
59

60. Questions?Questions?
60

61. 61
The presentation materials are for information purposes only and are not intended to
provided legal or accounting advice. Because every case is different, you should obtain
case specific legal and accounting advice from your own attorneys and consultants.