This article is the first in a two-part series on the role of insurance in ensuring food safety.
When people think of food safety, their minds tend to go first to government regulation—by the Food and Drug Administration (FDA) and other agencies.
Government regulation is indeed part of the food safety nexus in the United States. But it is not the only one. Other players include civil parties; mandates from specific industries, such as the Leafy Greens Marketing Agreement (LGMA); private food safety audits; testing requirements from large buyers such as Costco; and surprisingly, perhaps, insurance companies.
Timothy D. Lytton is a law professor at George State University College of Law who specializes in food safety issues.
His 2019 book “Epidemic: Foodborne Illness and the Fight for Food Safety” is required reading for anyone in the produce industry (or anyone else) who has anything to do with food safety.
The federal Food Safety and Modernization Act (FSMA) has created new and stricter measures to ensure food safety on farms.
But as has been widely publicized, the FDA does not have the resources or personnel to enforce these regulations at the farm level.
Recently, Lytton has investigated the potential role of insurers in filling this gap. Here is the link to his scientific article.
He has also written a popular version for Food Safety News.
In an interview on August 24, Lytton discussed some of his findings.
For starters, both family and commercial farming operations have insurance that includes liability coverage. Smaller farms have general farm insurance coverage; larger companies have general liability coverage. These generally cover food safety issues, although “the limits on that coverage will vary depending on the policy,” Lytton notes.
The purpose of insurance is to reduce risks. As a result, it also tends to eliminate incentives for risk aversion.
This is known in the industry as “moral hazard,” which means, “If you mitigate the consequences of bad behavior, then you encourage that bad behavior,” according to a source cited in the Texas Law Review.
In contrast, insurers have an interest in reducing their liability. They do this using four main approaches, according to Lytton:
1. Choice of risk. For example, someone with a record of poor audit results or poor regulatory compliance will have trouble getting insurance.
2. Premium pricing, giving “discounts to policyholders who have additional safety practices.” On the other hand, growers of higher-risk crops — sprouts, leafy greens, melons — may have to pay higher premiums.
3. Terms of the contract. The policy may exclude coverage if proper safety precautions are not taken. Sometimes the terms require the insured to pass private audits.
4. Loss of control. The insurer may provide safety advice to the insured.
Lytton says that in the most notorious outbreak of foodborne illness in produce – the baby spinach incident in 2006 – large companies such as Dole had huge liabilities, but these were paid by their insurers.
At least initially. Insurers had to recover that loss (as usual) with higher premiums.
“The bigger companies are paying very large premiums,” says Lytton. “It’s used to build internal expertise.”
With large clients, insurers may send consultants to point out potential problems and make suggestions for improvement.
The biggest players in agricultural liability insurance include Nationwide, Great American, Western Growers Association, Alliance Global, Liberty Mutual and Westfield. The American Farm Bureau Federation is also important, especially for smaller farmers.
“We know that the efforts of insurance professionals are stronger when premiums are high,” adds Lytton. This tends to exclude smaller farms, whose farm coverage premiums are low, often in the $500-$1,000 range per year.
One objective of Lytton’s study is to see how insurance can be used to encourage safety practices especially on smaller farms.