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Information on Insurance

What you Need to Know about Purchasing Insurance for Your Food Business
Information Resources for Purchasing Insurance for Your Food Business


What you Need to Know about Purchasing Insurance
for Your Food Business

Products Liability insurance is a must have for specialty food and beverage businesses, and it is an important part of risk management and sound business practice.

If you are selling your products through a retailer, you have likely already been asked to provide  proof of coverage by furnishing a Certificate of Insurance (COI). If you are selling your products directly to the end consumer, either through door-to-door delivery or through a farmers market that does not require a COI, you should consider purchasing Products Liability insurance.

Products Liability Insurance

Products Liability is usually covered as part of a General Liability insurance policy. So when you purchase Products Liability you will most likely need to purchase a General Liability policy. This means that you will purchase other coverage which is valuable to you.

General Liability has three components:

Coverage A: Bodily Injury or Property Damage from your Premises and Operations as well as your Products and Completed Operations

Coverage B: Personal & Advertising Injury

Coverage C: Medical Payments to Others

The typical retailer request for coverage ranges from $2MM - $5MM in General Liability coverage. Most General Liability policies offer you between $1MM and $2MM in liability coverage. If you are required to carry a higher level of coverage, you can increase the amount by purchasing a Commercial Umbrella Liability policy along with your General Liability policy.
Several factors affect the cost of the premium for this coverage. They are:

  • The classification of your business
  • The gross dollar value of your sales
  • The general liability history of your product (i.e., how often is a product like yours subject to a recall?)
  • Your business (and, for small firms, personal) credit history

Here are some considerations when shopping for Products Liability (or any) insurance:
Review your documents carefully.

  • Premiums and underwriting are based on information gathered about your business. The final determination of your business classification is made by the underwriter, not your agent. Make sure that your business is classified as accurately as possible, as this classification is used to determine your premium.
  • The written documents – your signed application; the issued policy and any amendments, exclusions, endorsements, etc. – are the authoritative word in your coverage. Verbal commitments from your agent are not valid should you have to make a claim. If you have any questions about your coverage, get an explanation, in writing, signed by one of the insurer’s underwriters.

Review any contracts that have insurance requirements closely.

  • Review with your agent any contracts from customers that request that you provide a COI. If your agent is not familiar with the requirements, ask to speak to someone at the insurance company’s home office, preferably an underwriter.
  • With the anticipated changes resulting from implementation of the Food Safety and Modernization Act (FSMA), you may be required to purchase additional coverage in the form of Product Recall Insurance (explained below). Product recall expenses are specifically EXCLUDED from General Liability policies.
  • You may be asked to name your retail outlet(s) as additional insureds on your policy.

Your policy may not cover your exported products.

  • General Liability policies have a defined coverage territory. It is highly likely that your policy will not provide you with protection if you export your products outside the United States, its territories and possessions. If you export, even just to Canada, you may want to consider talking with a knowledgeable insurance agent about appropriate liability coverage. Also keep in mind that not every country’s legal system operates the same way, so you may want to consider liability coverage that is best suited to the country (countries) where you are exporting.  Remember: This type of coverage is separate from your General Liability coverage for doing business within the United States.

Product Recall Insurance

Product recalls have increased over the last several years, and it is anticipated, with the changes brought by implementation of FSMA, that the frequency of recalls may increase. Many recalls are pre-emptive, in that no one has been harmed or injured by consuming a product. Nevertheless, all product recalls carry expenses along all parts of the food production and distribution chain.

The difference between Product Recall insurance and General Liability insurance is that Product Recall insurance provides protection for you in the event you must recall any of your products. Coverage can include product recall expenses and liability to third parties (such as retailers where your product is sold), who are seeking damages because your product recall could cause a loss of income or damage their reputation. If your product poses an imminent threat of property damage or bodily injury, Products Recall coverage should respond.

Product Recall has two components

Coverage A covers the following Direct Expenses associated with your product recall:

  • Cost associated with notifying customers
  • Shipping cost
  • Extra warehouse and storage expense
  • Actual cost to dispose of the products
  • The cost of extra personnel required to conduct the recall

Coverage B covers damages of a third party sustained due to a product recall attributable to your product. This covers your legal obligation to pay compensatory damages. Costs include but are not limited to:

  • The recall expenses of any third party for the recall of any product that incorporates your product including the cost to repair or replace such product
  • Business Interruption losses of others resulting from the covered incident (Note that this is not Business Interruption coverage for your business; you would need to purchase separate Business Interruption coverage for your company)
  • The cost to repair and rehabilitate your brand reputation
  • The additional cost to purchase substitute goods to replace your products

Why You Should Consider Purchasing Both Coverage A & B

Coverage A & B should be purchased together if any of the following conditions exist:

  • If there is a third party between your company and the ultimate consumer because the third party can claim loss of income or reputation due to the recall
  • If your company manufactures a product that is sold under a third party's name (in other words, you manufacture a private label product for another company). This could be a component or the finished product.

The only time Coverage B may not be needed is when you sell products under your own label or a third party is not involved. It is also important to note that Coverage B will not cover any direct expenses you could incur such as replacement parts, repair, retrofitting or disposal if the recalled product is returned to you for handling.

The same considerations for purchasing a policy noted above in the section on General Liability/Products Liability apply when purchasing Product Recall coverage.

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Information Resources for Purchasing Insurance for Your Food Business

General Information

Review this document from the NC Department of Insurance for a good, general overview of what you need to consider when buying any type of insurance for your business:

http://www.ncdoi.com/_Publications/Guide%20to%20Insurance%
20for%20Your%20Business_CBU1.pdf

Excess and Surplus Lines

Products Liability and Product Recall insurance are classified, for insurance purposes, as “excess and surplus lines.” As a result, they come under different rules than those that cover the type of insurance that you are most likely more familiar with, such as homeowners, premises liability, and auto insurance coverage. This is an important document to read to familiarize yourself with how your policy will be underwritten, and, more importantly, how a claim will be handled, should you need to make one.

This document is also from the NC Department of Insurance:

http://www.ncdoi.com/_Publications/Consumer%20Guide%20to%20Surplus%20Lines%20
Insurance_CBU1_CMI1.pdf

General Consumer Information

While most of what you need to know about purchasing insurance as a business person is covered in the above two documents, you may find this document, geared to the general consumer, of value:

http://www.ncdoi.com/_Publications/Consumer%20Guide%20to%20
Shopping%20for%20Insurance_CSH1.pdf

The Legal Perspective on Insurance

As a result of the extensive recalls that were nationwide and resulted, in some of the instances, in injury and death, a new body of case law is developing around food safety and products liability protection. This discussion by a legal firm gives a good outline of what to consider when purchasing products liability and product recall insurance, as well as what to consider from a legal perspective should you be involved in a recall.

http://www.kslaw.com/imageserver/KSPublic/library/publication/ca090412a.pdf

For more information, contact Annette Dunlap at Annette.dunlap@ncagr.gov, or call 919.707.3117.

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Ron Fish - Asst. Director - AgriBusiness Development
919-707-3119 fax: 919-733-0999
e-mail address: Ron.Fish@ncagr.gov