This article is the first of two parts about the role of insurance in ensuring food safety.
When people think about food safety, their thoughts usually go to government regulations – the Food and Drug Administration (FDA) and other agencies.
Government regulations are one aspect of food safety in the United States. But it is not the only one. Other players include judges; regulated by other industries, such as the Leafy Greens Marketing Agreement (LGMA); secret research on food safety; testing requirements from major retailers 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.
His 2019 book Outbreak: Foodborne Illness and the Fight against Food Safety It is essential 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 mature ensuring food security in farms.
But, as has been widely publicized, the FDA does not have the resources or staff to enforce these regulations on the farm.
Recently, Lytton has been researching the potential of insurance companies to fill this gap. Here is a link to his professional essay.
He has written again the most popular version of Food Safety News.
In an interview on August 24, Lytton discussed some of his findings.
For starters, family farming and commercial operations have insurance that includes liability coverage. Small farms have financial insurance; big businesses have a lot of debt. This is often related to food safety, although “the limits on those foods vary by policy,” Lytton says.
The purpose of insurance is to reduce risks. As a result, it also tends to eliminate incentives to avoid accidents.
This is known in the industry as “moral hazard,” meaning, “If you avoid the consequences of bad behavior, then you encourage that bad behavior,” According to another book written in the Texas Law Review.
Insurers, in contrast, are interested in reducing their liabilities. They do so using four main methods, according to Lytton:
1. Choosing risks. Someone with a history of bad accounting or poor tracking, for example, will have trouble getting insurance.
2. Premium rates, providing “discounts for policyholders with additional security measures.” On the other hand, growers of high-risk crops—plants, green vegetables, watermelons—may have to pay more.
3. Contract rules. This policy may include disclosure if appropriate security measures have not been taken. Sometimes these terms require the insurer to undergo special audits.
4. Loss of energy. Insurers can provide safety advice to policyholders.
Lytton says that in the worst outbreak of foodborne disease in crops—the one that happened to baby spinach in 2006—big companies like Dole had huge liabilities, but they were covered by their insurers.
At least at first. Insurers have to cover the loss (as usual) with a higher premium.
“The big companies are paying more,” says Lytton. “It’s used to build internal technology.”
With large clients, insurers may send consultants to assess potential problems and provide recommendations for improvement.
Major players in agricultural insurance include Nationwide, Great American, Western Growers Association, Alliance Global, Liberty Mutual, and Westfield. The American Farm Bureau Federation is also important, especially for small farmers.
“We know that the efforts of insurance professionals are stronger when wages are higher,” Lytton adds. This tends to leave out small farms, whose wages are low, usually $500-$1,000 a year.
One goal of Lytton’s research is to see how insurance can be used to promote safety, especially on small farms.