A recent recall of fresh onions has now been linked to at least 808 salmonella infections and includes onions from multiple sources, including HelloFresh and EveryPlate meal kits. According to an Oct. 29 update from the U.S. Food and Drug Administration, the salmonella outbreak has caused illness across 37 states and Puerto Rico and hospitalized 157 individuals. It has so far been traced back to two suppliers of whole, fresh onions imported from Mexico between July 1 and Aug. 31 and distributed to a variety of wholesalers and retailers.
HelloFresh and EveryPlate, the two popular meal prep services affected, are asking their customers to discard onions received in kits between July 7 to Sept. 8. On Oct. 21, the Canadian Food Inspection Agency also issued a recall of whole onions over the possible salmonella contamination.
“It is concerning,” said Yuri Petrasz, Underwriting Manager, Commercial Insurance, Burns & Wilcox, Chicago, Illinois. “Anytime that you hear there are agricultural food items being consumed by individuals and their lives are being impacted negatively, it is a scary thing for all of us. Picking up an onion at the store is not something folks typically give a lot of thought to.”
It is not the only recall to make national headlines in recent days. Walmart recently recalled 3,900 bottles of an aromatherapy room spray that could contain a rare, dangerous bacteria after the spray was linked to two deaths. The Better Homes and Gardens “Essential Oil Infused Aromatherapy Room Spray with Gemstones,” priced at about $4, was sold by the retailer between February and October of this year.
In both recall cases, the entities involved are likely to face substantial losses that could be covered under Products Liability Insurance or Product Recall Insurance, said Steve Bartell, Senior Broker, Casualty, Burns & Wilcox Brokerage, Chicago, Illinois.
“If you have individuals getting sick, being hospitalized or having long-term injuries or worse, that is when your product liability is going to skyrocket based on the pure number of individuals who could get sick,” Bartell said. “The exponential loss is more likely to be seen on the Products Liability Insurance side in this case.”
Illness, hospitalization costs among product liability risks
According to the Centers for Disease Control and Prevention, foodborne illness affects 48 million individuals in the U.S. each year, leading to 128,000 hospitalizations and 3,000 deaths. Salmonella is one of the most common sources of fatal foodborne infections, the CDC reports, and causes about 1.35 million infections, 26,500 hospitalizations and 420 deaths in the U.S. each year. The Public Health Agency of Canada estimates that about 4 million Canadians are affected by foodborne illness annually, with salmonella accounting for around 5% of these cases.
Companies often face lawsuits when a salmonella outbreak is linked back to their product. In October of 2020, a class-action lawsuit was filed against a California company over the “largest onion recall in Canadian history” after a salmonella outbreak sickened 515 individuals, Global News reported last year. In 2015, an $11.37 million judgment was awarded to a Nebraska couple after a salmonella exposure at a restaurant left the husband, who was medically vulnerable, with permanent damage to his health, Food Safety News reported.
When a company is sued because a consumer was sickened or otherwise harmed by a product, Products Liability Insurance can help cover expenses such as legal defense and indemnity payments. “Products Liability Insurance covers lawsuits over physical harm that is caused by a product,” Petrasz said.
There will likely be a lot of individual lawsuits [due to the onion recall]. Inherently, this is a pretty large-scale payout.
These recalls “can be very, very damaging,” Petrasz said, “not only in terms of dollar amount to the organization but also for their brand,” because it can take years for consumer confidence to rebound after a major recall that threatens consumer health. “Folks can be very fearful about that,” he said.
With so many consumers hospitalized due to the most recent onion recall, “there will likely be a lot of individual lawsuits,” Bartell said, pointing out that if hospitalization costs amounted to $100,000 each, that would mean an over $15 million loss from that aspect of the recall alone. “Inherently, this is a pretty large-scale payout,” he said.
One key consideration for Products Liability Insurance is whether the deductible will be applied per claim or per occurrence, he said. If a policy has a per-claim deductible of $5,000, for example, it could be multiplied by each individual affected by a foodborne illness outbreak. If the policy has a per-occurrence deductible, however, the entire outbreak could be covered under a single $5,000 deductible.
“That is something a lot of individuals do not think about, but if your product injures 100 consumers and they all file suit, you can end up having a half-million-dollar deductible on your policy,” Bartell said.
Consumer notification, lost production can be covered by Product Recall Insurance
Food recalls occur regularly in the U.S. and Canada. In 2020, the FDA announced 187 recalls and the USDA reported 31 recalls involving 1,462,019 pounds of recalled food. The Canadian Food Inspection Agency typically oversees an average of around 220 recall incidents annually.
With Product Recall Insurance, companies can be covered for recall expenses such as removing the contaminant, disposal and restocking costs, and notifying customers. It can also help companies recoup direct economic losses as well as indirect losses due to reputational harm. When Peloton recalled its Tread and Tread+ treadmills earlier this year after the death of an infant and 70 other reported injuries, the company estimated that its lost sales would cost about $165 million that quarter, CNN reported.
Although the recent onion recall asks that individuals dispose of potentially contaminated produce, other types of recalls can involve hefty return-shipping expenses, which is another common cost that can be picked up by Product Recall Insurance.
Any organization engaged in manufacturing or moving goods and services through our market economy needs to really be thoughtful about both Products Liability Insurance and Product Recall Insurance.
“You are not going to send it back, so there will not be as much recall expense,” Bartell said. “In this scenario, the largest recall cost is likely to be the reputational damage, adverse publicity, and, quite frankly, the economic loss coming from that. If your sales dip 20% because these items were recalled, an economic loss could be justified.”
Products Liability Insurance policies sometimes include limited coverage for recall expenses, however a separate Product Recall Insurance policy is generally needed. “That is not really giving them much of anything; the cost of notification alone, for example, could end up being more than the $25,000 or $50,000 worth of expenses that are allowed,” Bartell explained.
Consider crisis management, contractual requirements
From agricultural operations to grocery stores, many types of business can be vulnerable to recall and product liability losses.
“Any organization engaged in manufacturing or moving goods and services through our market economy needs to really be thoughtful about both Products Liability Insurance and Product Recall Insurance,” Petrasz said. “From the standpoint of protecting your particular balance sheet, organizations need to think about how much they can really afford to self-insure for something like this. Are they able to pay a claim, legal costs, and lost production costs? There is a lot that goes into that evaluation.”
Crisis management is the communications management function used to convey accurate facts and data to the general public during a crisis situation. This communication helps prevent or minimize negative publicity that could adversely affect a company’s brand and longevity.
Crisis management coverage can also be considered and is often offered as an additional line of insurance, Petrasz said. “This is insurance coverage designed to help a business limit the negative impacts of events on the business’s reputation,” he said. “Crisis management is the communications management function used to convey accurate facts and data to the general public during a crisis situation. This communication helps prevent or minimize negative publicity that could adversely affect a company’s brand and longevity.”
Contractual requirements are also likely to play a role in what policy limits an organization will need. Depending on what these contracts specify, companies could need to seek out Excess Liability Insurance layers, Petrasz said.
“When an organization thinks about this type of insurance, they need to make sure they have a transparent and direct conversation with their insurance and risk management advisors to identify products that will address their needs,” he said.
At the end of the day, your product could cause something that triggers a million-dollar recall. … The question is whether they can survive a recall and protect their balance sheet if they do not have insurance.
Companies should consider “all of the aspects that they will be responsible for covering, whether it is legal costs or replacement of product costs or lost time for your organization,” Petrasz said. “It adds up and it adds up very quickly.”
This can be especially true for smaller manufacturers, which could be less likely to be insured for recalls but just as likely to be responsible for a product that is ultimately involved in a recall. “At the end of the day, your product could cause something that triggers a million-dollar recall,” Bartell said. “Everybody has the risk for it, it is just whether or not they believe it will happen to them. The question is whether they can survive a recall and protect their balance sheet if they do not have insurance.”
