If the final farm bill keeps the Senate’s provision for a feasibility study of recall insurance, that will be just a starting point.

To make coverage a reality requires answers to questions that can seem like conundrums to insurers.

Even with farm bill provisions, recall insurance still long shotSen. Dianne Feinstein, D-Calif., introduced the Senate amendment with an eye to companies swept up in a collapsing market when a competitor’s product is linked to contamination, said Art Garrett, general counselor and partner in Washington, D.C.-based Keller and Heckman LLP. The law firm advises the Produce Marketing Association, among others.

“Feinstein is concerned about those growers who get caught up in a hysteria or panic,” Garrett said. “Collateral damage is what she’s focused on.”

Recall insurance is already widely available but has limited relevance, said Greg Nelson, director of commercial lines and risk management at Irvine, Calif.-based Western Growers Insurance Services.

“Most major companies and several of the Lloyd’s syndicates offer it,” Nelson said. “It pays for the expense of bringing your product back from the market, loss of income, recovering your brand name. It’s a lot of coverage, but the policies specify that the only way you can recover is if your product causes injury or illness. It can’t be someone else’s product.”

Some insurers also require the recall to be mandatory. That’s problematic, to say the least.

“The reality is the federal government never formally requires anybody to recall,” Nelson said. “They’ve gotten everybody to do it voluntarily.”

Even with farm bill provisions, recall insurance still long shotMatt McInerny, executive vice president at Western Growers, says the challenges are multiple.

“One is to develop a robust coverage for the larger or smaller contained voluntary market withdrawals,” he said. “Have triggers for that, but have this other really broad coverage for innocent bystanders on the production side who are harmed through no fault of their own.”

Insurers have widely excluded recalls from liability coverage, offering it instead in a separate policy. But discussion of recall insurance seems to lead inevitably to concerns about liability.

“What keeps me up at night is an unprotected scenario that’s an equivalent of a Jensen Farms situation,” McInerny said, referring to the listeria outbreak in Colorado cantaloupe linked to more than 30 deaths.

“Inadvertently you fall into a tragedy beyond comprehension that takes up multigenerational assets built up over time,” he said. “How do you manage the risk? You do it on auto, on liability, but this one is tough. We’ve engaged insurance suppliers globally to see what could be collaborated on that would have layers of protection for everyone in the supply chain, but it’s been elusive.”

Western Growers has sought a solution for several years, Nelson said.

“There have been some efforts by a few companies to broaden the coverage a bit, to add endorsements that will cover similar products,” he said. “We’ve really only seen one that seemed possible, but under further questioning we pointed out some issues and haven’t heard back from them yet.”

What makes broad coverage elusive so far is the challenge of underwriting it.

“If I’m the insurance carrier,” McInerny said, “how do I price it to the risk appropriately to gather enough premium dollars to cover my exposure and then, as they do in the reinsurance market, lay off some of the risk on others?

“If I’m underwriting for Lloyd’s and looking at the last five to 10 years of catastrophic outbreaks, and see it was $100 million here and $50 million there, how do we garner the premium dollars? You’ve got multiple handlers, multiple producers, multiple touch points.”

“How they work business interruption into a recall policy, I don’t know,” Garrett said. “I guess that’s why they (the Senate) are calling it a feasibility study.”

The United Fresh Produce Association, for one, welcomes the study. United Fresh members were briefed on recall insurance issues at the annual convention in May.

“We talked to that group as well,” McInerny said. “Multiple people are asking, ‘How do you a draw up a policy to guard against (third-party damage)?’ It’s hard to quantify your exposure and develop a program of the magnitude needed to address the problem.”

But until something better comes along, Nelson offers some guidelines.

“My recommendation is to take the insurance with a high deductible for catastrophic events,” he said. “We’ve sold almost no coverage at all because everybody is looking for that collateral damage. People who buy it at the low deductible, $5,000, are finding it pretty expensive. We recommend buying it with a $10,000 or $25,000 deductible, but each company has to decide.”

In the end, the calculation on insurance costs of any kind can be a matter of common sense, as Nelson sees it.

“You weigh the value of the company against the cost of the insurance,” he said. “If you make $100,000 in salary a year and someone says your auto insurance is a couple thousand dollars, that’s not bad. But $25,000 is ridiculous. It’s the same thing in business. On the liability side, I don’t know if Jensen Farms could have bought enough insurance. Liability there will be in the tens of millions.”

It’s fairly rare for a food safety event to affect hundreds or thousands of growers and shippers, as the Colorado listeria outbreak did with cantaloupe, Nelson said.

“Maybe your efforts should be more focused on the prevention side,” he added.