This article is the first in a two-part series on the role of insurance in ensuring food safety.
When people think about 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 litigators; mandates by specific industries, such as the Leafy Greens Marketing Agreement (LGMA); private food safety audits; testing requirements from large purchasers such as Costco; and surprisingly, perhaps, insurance companies.
Timothy D. Lytton is a professor of law at George State University College of Law who specializes in food safety issues.
His 2019 book Outbreak: Foodborne Illness and the Struggle for Food Safety is necessary reading for anyone in the produce industry (or any other) who has anything to do with food safety.
The federal Food Safety and Modernization Act (FSMA) has created new and more stringent 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 been investigating the possible role of insurers in filling this gap. Here is the link to his scholarly article.
He has also written a more popular version for Food Safety News.
In an interview on August 24, Lytton discussed some of his findings.
To begin with, both family and commercial farming operations have insurance that includes liability coverage. Smaller farms have general farm insurance coverage; larger enterprises 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 avoiding risk.
This is known in the industry as “moral hazard,” meaning, “If you cushion the consequences of bad behavior, then you encourage that bad behavior,” according to one source quoted in the Texas Law Review.
Insurers, by contrast, have an interest in reducing their own liability. They do so using four principal approaches, according to Lytton:
1. Risk selection. Someone with a record of bad audit scores or bad regulatory compliance, for example, will have trouble getting insurance.
2. Premium pricing, giving “discounts to policy holders who have extra safety practices.” On the other hand, growers of crops with higher risks—sprouts, leafy greens, melons—may have to pay higher premiums.
3. Contract terms. The policy may exclude coverage if proper safety measures have not been taken. Sometimes the terms require the insured to pass private audits.
4. Loss 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 like Dole had huge liabilities, but these were paid by their insurers.
At least initially. The insurers had to recoup that loss (as usual) with higher premiums.
“The larger companies are paying very big premiums,” Lytton says. “It’s used to build in-house expertise.”
With large clients, insurers may send advisers to point out potential trouble spots and make suggestions for improvement.
The biggest players in agricultural liability insurance include Nationwide, Great American, the Western Growers Association, Alliance Global, Liberty Mutual, and Westfield. The American Farm Bureau Federation is also important, particularly for smaller farmers.
“We know that the efforts of insurance pros are more robust when premiums are high,” Lytton adds. This tends to exclude smaller farms, whose farm coverage premiums are low, often in the range of $500-$1,000 per year.
One objective of Lytton’s study is to see how insurance can be used to encourage safety practices especially on smaller farms.