Farming centers around the production of food (a product that people ingest), making it important to consider what you are raising or growing and how it is sold to determine if you need to manage your production and marketing risk. Product liability insurance provides protection if a food borne illness results from a product you sold. It will pay for injuries and medical treatment resulting from consumption of your product. In addition to addressing the needs of your customers, this coverage will also pay your defense costs in a lawsuit, and any judgments of the court, up to the policy limit.
If you have reviewed your farm owner's insurance document, you know that in most cases a limited amount of product liability insurance is included in that coverage. However, there are several different types of production and marketing activities that farmers may pursue that require additional insurance:
- Direct marketing of farm products in their natural state
- Selling to restaurants or grocery stores
- Making and/or selling value added products (such as salsa from your tomatoes)
Increasing demand for locally grown foods has encouraged many farmers to set up roadside stands, on-farm markets, or stands at a community farmer's market. Consumer research shows that a majority of people who buy direct from the producer believe that the food is safe for their families - and for the most part, their belief is correct. However, incidents that have been nationally reported, such as spinach that contains E. coli or melons with listeria, serve as examples that the unexpected can, and does, happen. Many farmers' markets are now requiring product liability insurance in the amount of over $500,000. This type of coverage protects both whoever markets your product and your own business, in the event someone becomes ill due to a product you sold. The marketing entity will be named on the insurance policy along with your farm, so that everyone's risk is effectively managed.
Restaurant and Grocery Sales
Many consumers look for restaurants or family-owned groceries that carry locally produced foods, resulting in wholesale marketing opportunities for small- and medium-sized farms. If you sell to restaurants or a local grocery store, you will need product liability insurance, because if a customer becomes ill after eating a meal that includes your product, you will likely be named as a co-defendant with the retail establishment in any resulting lawsuit. You may find that many chefs and purchasing agents will be interested in the production and harvesting methods used on your farm (perhaps requiring Good Agricultural Practices/Good Handling Practices (GAPs/GHPs) certification to increase food safety - but even such certification does not negate the need for insurance.
Value Added Products
Adding value to your farm products may be as simple as cutting a melon into slices or as detailed as making jam from your berries. Because cutting, mixing or cooking agricultural products beyond their natural state introduces the opportunity for biological, chemical or physical hazards, adding value will trigger the need for a higher level of protection. Farmers who add value through a limited food enterprise (also known as a home based food business) need to insure their home kitchen separately from the rest of the farm, as well as getting product liability insurance for the resulting food items. If you make your value-added items in a shared community kitchen, you will have to purchase product liability insurance, including the kitchen entity as an "added named insured" on your policy. Some agricultural producers take their products to a co-packer who makes private-label foods for the farm to sell. If you plan to do this, it is wise to explore with your insurance provider whether the co-packer's product liability insurance is adequate, or if you should have your own coverage (since the foods will bear your farm or business name).
The premium for product liability is based on several items:
- The amount of sales
- A detailed description of the product(s) you sell
- The number of years you have been in production
- Any past incidents in which you may have been involved
- The products you are marketing
You will be required to show the company sales records indicating the volume of production, or products you have sold. If this is your first season direct marketing or you are just beginning to make your value-added product, you may need to estimate this figure. Estimating on the higher end of your planned sales is a good strategy to be sure you have adequate protection. If you have past sales records, you should take into account any increases in planned production, or prices.
You need to describe all product(s) that you sell or are planning to sell. You may also be required to describe your production practices (such as GAPs/GHPs certification or whether you use organic or conventional methods). If you are direct marketing only agricultural products in their natural state (such as whole heads of lettuce, versus a salad mix) you still have risk exposure. However, if you are selling processed products (either your own or purchased) you will have additional liability, as discussed above. It is in your best interest to include everything you sell or plan to sell in your description. Because the food safety regulations/expectations change on a regular basis and your list of products may change, as well, this will be one area that is revaluated each year when the policy is renewed.
Years of Production
If you have been producing a crop for several years, selling what you grow in the wholesale market, your premium may be lower due to your experience with that crop. If you have been producing a value added item for a limited time and are just beginning to sell that product to the public, your experience may be counted in setting the cost for your coverage.
After a claim is settled, an insurance company may either drop your policy or raise your rates substantially, resulting in the need to look for new coverage. If you are changing insurance providers, any past claims to previous policies may count against your insurability (and may even deter the company from writing a policy for you). If you have had a claim, it is good to be honest and complete as you talk to a new provider. Make sure all documents pertaining to the previous claim are available to the salesperson, so that the company can evaluate the claim, and determine if, and how, it will affect your new coverage.
As previously stated, the sales person and the company will need to know all products you sell or plan to sell. Intentionally or unintentionally failing to identify a product or products may make a policy void, in the event of a claim. The coverage related to food items is directly related to the potential hazards associated with the products -it is often not an intuitive matter. For example, farm families may drink raw milk from the bulk tank without becoming ill (because they have antibodies from long exposure) but their customers who do not have the natural protection will become sick. For this reason, it is important to clearly describe all food products sold by your farm.
Many people who sell directly to consumers make the mistake of assuming that good customer relationships will help them avoid risk. They don't see the need for product liability insurance, instead believing their customers' claim, "we would never sue if something we purchase from you makes us ill." No matter how good the friendship, that good will ends at the emergency room door. When someone becomes ill enough to require a doctor's care, and a medical claim results, the insurance company will look to you to cover the cost, plus their expenses in paying the claim.
Another type of specialized coverage related to product liability is product recall insurance. Recall insurance covers some of the costs associated with notifying the public of a problem, and removing contaminated product off store shelves. Recall insurance is usually associated with value-added products or items that pass through a number of middlemen before being sold, so if you are adding value or selling through a broker, you should consult your insurance provider about whether product recall insurance applies to your situation, taking action accordingly.
In summary, product liability insurance will assist you if any food item you sell results in a food borne illness. It will pay for their medical treatment, and if you are taken to court, will cover at least a portion of your legal bills and any judgments against you. By purchasing this type of policy, you will be protecting your farm and family assets from the liabilities associated with selling a product that is consumed by your customer.
- The amount of product sales (either actual or projected)
- A detailed description of the raw products you plan to sell, including all crops and the amount of each crop
- The length of time you have been producing each crop
- If you have a past claim, take all records related to that claim(s)
- A detailed description of all value-added products you plan to sell including manufacturer (either yourself, or your co-packer)
- (If adding value or selling through a broker) discuss applicability of product recall insurance
Prepared by Lynn F. Kime, extension associate; Winifred W. McGee, extension educator; Robert Faubel, independent insurance agent, Danner's Insurance; and Maggie Garcia-Taylor, insurance agent, Garcia-Taylor Insurance Agency.
This document is based on work supported by USDA, Risk Management Agency, 2014 Risk Management Education Partnerships Program, Agreement Number 14-IE-53102-036.