Insurance for Agriculture

Nearly 200 years ago, agricultural workers made up almost 70 percent of the American labor force. However, changes in today's economy and the decline of small American farms has reduced this number to less than two percent of the labor force. If there are fewer people working in the agriculture system, how much detail still goes into the oversight of food production? Consumers are often blind to the production of their food. Critics speak out about their concerns for the future of farms, the average American diet, and the ethical issues behind the systems creating food.

All of these concerns may be valid, but there is no sign of factory farms halting production anytime soon. Instead, various media platforms help unveil some of the disturbing practices in food production. The media is not the only one holding the food production industry accountable. Insurance companies play a major role in the protection of American food consumption through increasing the loss control of food producers they insure (Friedli, 2017). There is a lower number of farms competing in the industry, so the burden of contamination losses is highly concentrated. The high concentration of potential losses creates an economic opportunity for insurers to cover losses from contamination. By insuring food contamination, carriers incentivize factory farms, manufacturers, and distribution companies to commit to better preventative practices.

In 2011, congress passed the Federal Department of Agriculture (FDA) Food Safety Modernization Act in response to the following foodborne illness breakouts: Salmonella Typhimurium, Salmonella Enteritidis, and Listeria monocytogenes. One of the key changes from this regulation requires the FDA to take on a preventative role in an effort to decrease the possibility of those breakouts. The act also requires "inspections with frequency based on risk" to spend more time investigating riskier production systems (Kennedy, 2014). As the FDA inspects food processing companies in greater detail, companies are more likely to seek insurance coverage for potential losses. Although the FDA regulates food safety, each company is liable for the safety of their food products until they are in the hands of the customer. Pesticides are commonly used to combat contamination as food moves from different hands within the agriculture system. Synthetic insecticides, such asfungicides, are most commonly used during the production of food to control pests and increase the amount of 'fresh' produce (Aktar, 2009). These pose hazards because the lethal doses to target plants have been proven hazardous to other species, including people (Aktar, 2009). This is why companies obtain coverage through policies offered by insurers like Swiss Re, Lexington, and Chubb.

From the moment the FDA recalls a product, costs occur for all companies involved in that product's production, transportation, and distribution. The cause of the recall could come from several points during the supply chain. For example, pesticides are sprayed on a corn farm, but more pesticides are sprayed throughout the trip to the distribution center. While trying to prevent food contamination, companies are adding synthetic insecticides that come with a new set of risks. Insurance can help reduce the millions of dollars in losses and allow faster recovery from catastrophic contamination in the food industry. Potential risks are best classified in three sections: bodily injury, third party claims, and product recall. Even the best case scenario; a product is recalled and not actually contaminated, "can easily reach the double-digit million-dollar range" (Friedli, 2017). Beyond product recall, bodily injury and third party claims from contamination are potential coverage needed along the farm to table spectrum.

There are three main types of policies? general liability, property, and accidental product contamination? written to offer coverage for food contamination claims. Each depends on the different source of the contamination issue. Exposures range from determination of the contamination source, distribution of the food, and the pesticides involved. In an effort to handle these exposures, insurance brokers provide services for each link in the food supply chain. Sheri Robinson is the CEO a team of insurance brokers who help clients understand and manage all of their exposures. After 15 years in underwriting several lines of business, Robinson sees insurance as a "valuable asset to food companies carrying such a large weight of their industry" (Robinson 2018). In the event of a contamination case, each policy can benefit a different stage of that food's production. Keeping food 'fresh' as it travels from farms that are further away from households is a growing concern in the industry. Studies by Swiss Reinsurance engineers recognize the potential growth in specialized policies for the lack of coverage in the agriculture process (Friedli, 2017).

Even when insureds comply with their carrier's requirements, exclusions often prevent coverage of their more frequent claims. Insureds rarely collect due to the extremely specific circumstances described in the policies. Tony Consoli, the National Health Care & Life Sciences Practice Leader for CBIZ Insurance Services, supports the business of clients with food contamination losses. However, he does warn that "the devil is in the details" when it comes to underwriting those policies (Consoli, 2018). According to Consoli, CBIZ Insurance Services has clients in Kansas whose policies require "concise coverage and narrow exclusions" (Consoli, 2018). Insureds are the ones who usually forget about their policies' details when making claims. One example is the product recall exclusion under business risk exclusions for general liability policies. Business risk exclusions means normal risks that come with business are not covered. The product recall exclusion is specific to costs due to the inability to recall a product. Many judicial decisions end up siding with the insurers because the claims failed to fit definitions within their policy (White-Mahaffey, 2014). Hillside Bottling Company recalled everything incase of contamination. Atlantic Mutual Insurance Company would not cover the products that turned out to not be contaminated. The smallest possibility of contamination could cause the FDA to recall a product, but the insurer may only cover the losses of the individual products proven to be contaminated.

On the other hand, insurers can also find themselves at a loss if they do not look at the different risks a certain food product faces. In the Security National Insurance Co. v. GloryBee Foods, Inc., coverage for claims was found from a recall imposed by the detection of salmonella in peanuts (White-Mahaffey, 2014). Nature's Path alleged indemnities due to the peanut recall since they could not remove peanuts once their product was made. Security National Insurance had to extend coverage to the peanut butter because the inability to separate the insured peanuts from the peanut butter was considered an unusual business risk (White-Mahaffey, 2014). Consoli recommends insurers pay close attention to the language used in their exclusions (Consoli, 2018). In the peanut butter case, Consoli says "Security National Insurance did not consider the different uses of GloryBee Foods' product and the risks associated with their customers" (Consoli, 2018). Insurers can take advantage of these specific needs by selling policies to every step of the farm to food process.

More claims may occur as the food industry straddles the line of 'safe' versus legal levels of pesticides. SwissRe found that food recalls in America more than doubled in frequency between 2004 and 2014 (Friedli, 2017). The process of food production has gone from small individual farmers to large factories with little understanding of what they are responsible for. The FDA continues general regulation, but they do not provide solutions for handling losses. Insurance companies have the answers when it comes to loss prevention and preparing funds for the inevitable increase in future claims (Friedli, 2017). Guaranteeing access to safe food relies on companies defining their exposures and mastering the loss control for those exposures. Carriers support federal regulation in pursuing strong reinforcement of preventative loss management skills to insure the future of America's agricultural industry.

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