Certain you have coverage for recalls or losses stemming from contaminated products?

Contaminated products insurance protects food and beverage companies from losses occasioned by contamination (sometimes accidental, sometimes otherwise) of their products and usually also covers expenses incurred by government imposed recalls.  It’s added protection can keep an expensive recall from becoming a break-the-company moment.  As with all insurance you apply for, up-front disclosure of facts and circumstances requested in the application is more than just honest and good practice, it forms a basis for the insurance contract (yes, all insurance policies are contracts) and an omission or falsification can create the grounds for the insurance company’s denial of coverage or rescission of the policy.

In a startling reminder of this, Heinz recently lost the appeal of a case against its insurer, Starr Surplus Lines Insurance Company, when Starr sought to rescind a policy for contaminated products that had a $5 Million self-insured retainer (deductible) after Heinz made a claim on the policy based on a recall.  The recall Heinz sought coverage for was of lead-contaminated Chinese baby-food which occurred back in August of 2014.  Starr investigated the claim and denied coverage asserting that on its application Heinz had failed to disclose two out of three losses exceeding $5 Million in the ten year period that had been the subject of the application’s questions.  The questions at issue are common to most insurance applications and it is worthwhile to understand that in answering them, best efforts might not be enough, a diligent inquiry and full disclosure could be the difference between coverage and the lack of it:

Has the Applicant, its premises, products or processes been the subject of recommendations or complaints made by any regulatory body, internal or third party audit over the past 12 months or have any fines or penalties been assessed against the Applicant by any food or similar regulatory body over the last 3 years?

In the last 10 years has the Applicant experienced a withdrawal, recall or stock recovery of any products or has the Applicant been responsible for the costs incurred by a third party in recalling or withdrawing any products, whether or not insured or insurable under an accidental and malicious contamination policy?

The District Court found and the Appellate Court agreed that the failure to inform the insurance company of the additional losses which were all well in excess of the $5 Million self-insured retainer that Heinz sought and Starr provided, was material.  Noting that the “failure to disclose is as much a misrepresentation as a false affirmative statement.”

You can read the full opinion here.  Given that you never know when or how a recall might become necessary, the important tip here is to ensure you check and double-check those applications and any obligations to update or provide new information to your insurer either during the application process or afterwards as compliance with the contract could mean the difference between having coverage for a loss or bearing it directly.

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