Recent Hot Pockets Recall for Plastic Contamination Highlights the Various Types of Potential Insurance Coverages for Food Recalls

On January 15, 2021, Nestlé Prepared Foods issued a Class I recall for approximately 762,615 pounds of pepperoni hot pockets.  The reason: the hot pockets were potentially contaminated by foreign objects, specifically pieces of plastic. 

While the idea of plastic in your food is unappetizing, its presence in prepared foods seems to be a recurring trend.  In 2019, Mizkan Food, Inc. recalled certain Ragu pasta sauces because the sauce could have contained fragments of plastic.[1]  In 2020, Amity Packing Company recalled 2,020 pounds of ground beef after thin pieces of plastic were found in it.[2]  Also in 2020, Sun Valley Foods, LLC recalled its ready-to-eat beef and chicken taquitos and chimichangas products due to traces of hard plastics.[3]  And, later in 2020, Lidl BG recalled its “simply mature white cheddar” because it could have contained pieces of plastics.  According to Food Safety Magazine, of the 50 food recalls in 2019 due to foreign contaminants, more than half were due to the possible presence of plastic.[4] 

Without question, the continuing rise of plastic in food products and the resulting recalls present unique risks to those in food industry and related industries.  As discussed below, there are several types of insurance that could respond to recalls and mitigate such risks.  Companies should understand these potential coverages and work with their internal and external insurance professionals to regularly review their insurance program and assess their needs.

Commercial General Liability Insurance

The Commercial General Liability (CGL) policy is the standard business policy that protects an insured against claims of liability for bodily injury, property damage, and personal and advertising injury.  It can also provide coverage for medical expenses incurred as a result of the bodily injury and coverage for claims of emotional distress.  An important feature of the CGL policy is that it typically obligates the insurer to defend the insured against any suit seeking damages for bodily injury.  Coverage for defense costs can be a huge benefit in costly litigation, especially because amounts paid to defend the insured seldom erode the policy’s limit of liability, leaving the full policy’s limit available to pay for a settlement or judgment.

If a consumer suffers “bodily injury” (that is, “bodily injury, sickness or disease”[5]) from ingesting a food product that contains plastic, the CGL policy should provide both defense and indemnity coverage for related claims against the insured business responsible for the contaminated food.  For example, Nestlé has had a report of a consumer suffering an oral injury from a plastics-contaminated hot pocket.[6]  The CGL policy should cover Nestle’s defense and indemnity costs associated with that claim. 

A CGL policy also covers damages the insured become legally obligated to pay because of “property damage.”  Courts have reached varying conclusions regarding whether the presence of a foreign object in food, such as plastic, causes “property damage” and whether the resulting damages are covered under CGL policies.  Compare Shade Foods v. Innovative Prods. Sales & Mtkg., Inc., 78 Cal. App. 4th 861 (2000) (“property damage” requirement met when “potentially injurious material in a product causes loss to other products with which it is incorporated”) with Sokol & Co. v. Atl. Mut. Ins. Co., 430 F.3d 417 (7th Cir. 2005) (because spoiled food did not impact other food in the boxes, and the act of opening and closing boxes is not an “injury,” there was no “property damage”).  As a result, whether damages suffered from the presence of foreign objects in food will constitute covered “property damage” under a CGL policy  will depend on the specific facts at issue and applicable law. 

Despite, the potential coverage for “bodily injury” and “property damage,” certain exclusions in CGL policies can limit coverage for many costs associated with a product recall.  These exclusions include, among others, the “Your Product” exclusion, the “Impaired Property,” exclusion, and the “Sistership” exclusion.  Consequently, businesses often look to specialized recall and contamination policies to fill in resulting coverage gaps.    

Product Recall & Contamination Insurance

Product recall insurance is a specialized form of coverage that can prove invaluable for  manufacturers and distributors of food products when faced with events like recalls.  While specific policies may differ, generally speaking these policies cover out of pocket expenses for conducting the recall, product replacement costs, lost profits, and related public relations expenses.  Some policies may also cover the costs of destroying a product in response to or anticipation of governmental orders.

Contamination insurance is another type of specialized coverage that may cover similar costs as those covered by product recall insurance.  However, contamination policies are typically triggered by the contamination of the insured’s product during production of the product. As such, the insured does not have to initiate a recall to obtain coverage.  Also, many contamination policies do not provide coverage in the absence of bodily injury.  In contrast, product recall insurance is typically triggered by the recall of a product itself and provides coverage irrespective of any bodily injury. 

Because the language of product recall and contamination policies can differ substantially among insurers, insureds should understand what their policies cover as well as their specific potential risks.    

Directors & Officers (D&O) Insurance

In the face of a product recall, a business may witness lawsuits by shareholders and investors.  These kinds of claims can be covered by D&O insurance.  Generally, D&O insurance provides three types of coverage—indemnification of individual directors and officers when the business cannot legally indemnify them (Side A coverage), indemnification of the business for payments made on behalf of directors and officers (Side B coverage), and, sometimes, coverage for the business itself for certain claims against it, such as securities or employment-practices claims (Side C coverage). 

In short, any company in the food industry should evaluate its D&O coverage if a product recall leads to demands, investigations, or lawsuits against its directors and officers or the company itself. 

Property Insurance

In some instances, first-party property insurance may also respond to a product recall situation.  Property insurance covers against physical loss or damage to the insureds real or personal property.  It can also cover an insured’s lost business income resulting from the interruption of its operations due to the property damage. 

A claim for coverage under a property policy in the food recall context is often due to contamination of the food product.  Many courts have held that the contamination of food products meets the requirement for physical damages.  Blaine Richards & Co. v. Marine Indem. Ins. Co., 635 F.2d 1051 (2d Cir. 1980) (fumigation of beans with pesticide not approved for use in the United States resulted in physical damage covered by the policy).  If a product becomes contaminated with a foreign substance, such as plastic, the product may be deemed to be damaged because the property is unfit for consumption, triggering coverage.  See, e.g., Pepsico, Inc. v. Winterthur Int’l. Am. Ins. Co., 2004 WL 3092342 (Sup. Ct. N.Y. Dec. 10, 2004) (contamination of products rendered products commercially valueless; property policy should cover the costs to replace the products at their regular cash selling price). 

While contamination of food products has been held to constitute “physical damage,” under property policies, certain exclusions are routinely used to challenge such coverage.  These exclusions include the “Contamination” exclusion, the “Pollution” exclusion and the “Virus or Bacteria” exclusion.  However, these exclusions can vary greatly between property policies and their application will largely depend on the specific facts, exact policy language and applicable law. 

Ultimately, companies in the food production industry must be knowledgeable about the risks they face and the tools at their disposal to mitigate those risks.  In many instances, the various insurance products discussed above can be vital to saving a business from the costly fallout associated with a food product recall.