With the growing number of food contamination outbreaks and the ensuing multi-million dollar personal injury lawsuits being filed by sick consumers, as well as recent scientific research and technological advances that have made it easier to rapidly and accurately trace back the source of pathogen contamination to a particular crop and field, it is crucial for farmers and growers to minimize their potential liability risk exposure. Many small farmers and processors are now spreading their risk of liability by requiring that they be named as additional insureds under their respective commercial general liability insurance policies. However, there are other risk allocation measures that small farmers should seek in order to better protect their business. One such measure is obtaining a waiver of subrogation from the processor’s liability insurance carrier.So what is subrogation? And why should a grower try to obtain a waiver of subrogation? Subrogation, while constituting a highly complex area of the law, essentially is the right of one party to step into the shoes of another party for the purpose of asserting a damages claim. (Phoenix Ins. Co. v. United States Fire Ins. Co. (1987) 189 Cal.App.3d 1511, 1525-1526)
Subrogation rights are often used by insurance companies to seek damages from a wrongdoer after having paid on an insured’s claim. Most insurance policies therefore include an express subrogation clause that gives the insurance company the right to step into the shoes of their insured in the event it has to pay under the insurance policy.
For instance, Section IV (8) of the Commercial General Liability Policy provides, as follows:
“If the insured has rights to recover all or part of any payment we have made under this coverage, those rights are transferred to us. The insured must do nothing after loss to impair them.”
In California, an insurer seeking subrogation after it has paid a claim for its insured must establish, among other things, that the insured suffered a loss for which the defendant is liable either (a) because the defendant is a wrongdoer whose acts or omissions caused the loss or (b) because the defendant is legally responsible to the insured for the loss caused by the wrongdoer. (Fireman’s Fund Ins. Co. v. Wilshire Film Ventures, Inc. (1997) 52 Cal.App.4th 553)
By way of example, a typical subrogation lawsuit can arise if one makes a property damage claim due to an auto accident caused by a negligent driver. Your collision coverage insurer will pay for the repairs to your damaged car. Your insurer will then be “subrogated” to your rights against the party who caused the accident. Thus, your insurer can step into your shoes to make a subrogation claim and/or file suit against the negligent driver (‘the wrongdoer”) who caused the accident for the purpose of recovering the costs it paid to repair your vehicle.
In the context of a leafy green, food contamination claim and/or lawsuit, a subrogation right may arise when the insurance company of any one of the defendants in the chain of delivery of a pathogen-contaminated, leafy green product, such as the processor, pays on a covered business loss claim. Subsequently, the source or cause of contamination is ultimately traced back to a particular farm field owner or operated by the grower.
In such a case, the nature of the processor’s business loss claim could be quite substantial. During the onset of the outbreak and the ensuing governmental agency investigation, the processor may have been forced to temporarily shut down its processing plants for weeks, thereby incurring a substantial loss of business. Further, the processor may have made a broad product recall of all leafy green food items it packaged at its plants and/or destroyed all leafy greens it processed. The processor’s product recall losses could include such items as lost sales, damage to goodwill and a broad array of extra expenses. Additionally, the news of a leafy green food outbreak will have negatively impacted the entire national market of the implicated leafy green product, causing the processor and others in the industry additional and possibly devastating financial losses.
Under this scenario, if the processor’s insurance company paid on the processor’s business loss claim, the insurance company will be highly motivated to assert its subrogation rights. The insurance company will step into the shoes of its insured processor to file suit against the grower to recover for the payments it made to under the business loss coverage. Thus, the implicated grower of the contaminated leafy green product will be exposed not only to multi-million dollar personal injury lawsuits made by sick consumers, but also subrogation lawsuits by insurance companies that paid on large business loss claims to processors or retailers that formed part of the distribution chain of the product.
The detrimental effects a small farmer or grower faces if exposed to potentially large and broad liability consumer personal injury lawsuits and insurance subrogation actions can be devastating. Ultimately, the small farmer or grower can be quickly forced out of business and into bankruptcy.
Therefore, it is crucial for farmers and growers to minimize their liability risks by bargaining for and obtaining a waiver of subrogation claims from all insurers of the parties involved in the chain of distribution of any leafy green product. Obtaining such a simple subrogation waiver can reduce the grower’s liability exposure to zero with respect to any subrogation claims brought by insurance companies that paid on business loss claims. Ultimately, a subrogation waiver may save the farmer millions of dollars and thereby allow the farmer to survive the storm of a food contamination outbreak.
Therefore, it is crucial for farmers and growers to minimize their liability risks by bargaining for and obtaining a waiver of subrogation claims from all insurers of the parties involved in the chain of distribution of any leafy green product. Obtaining such a simple subrogation waiver can reduce the grower’s liability exposure to zero with respect to any subrogation claims brought by insurance companies that paid on business loss claims. Ultimately, a subrogation waiver may save the farmer millions and thereby allow the farmer to survive the storm of a food contamination outbreak.
This editorial first appeared in Volume 2-2 of L+G’s Food Safety Newsletter, in December 2008.