Use of insurance to regulate food safety

Insurers can help farmers manage the risk of microbial contamination in their fields.

Foodborne illness is a public health problem of pandemic proportions. The CDC estimates that contaminated food sickens 48 million Americans each year, causing 128,000 hospitalizations and 3,000 deaths annually. Nowhere is this crisis more acute than in the fresh produce sector, where infectious microbial pathogens in fields and packinghouses are causing many of the nation’s largest and deadliest outbreaks.

Federal regulations developed in recent years have established strict new standards to improve food safety on farms. The US Food and Drug Administration is responsible for enforcing these regulations, but lacks the inspection resources needed to oversee the more than 120,000 US farms that grow fresh produce.

Significant help in filling this oversight gap could come from a surprising source: the insurance industry.

A recently published study of mine documents emerging efforts by insurers to monitor and enforce compliance with food safety standards on farms. These efforts, if successfully scaled, could transform the US food safety system, not just on farms but throughout the food industry.

Insurance groups risk protecting policyholders from the potentially devastating financial consequences of unexpected losses. A disadvantage of insurance is that, by relieving the insured of financial responsibility for accidents, insurance removes an important incentive for them to exercise care, which could increase the risk of accidents. Economists refer to this as the moral hazard problem.

To address this problem, insurance providers often create new incentives for policyholders to reduce risk. Numerous insurance case studies have described how insurers use a variety of techniques to reduce risk. These techniques include premium discounts for policyholders who take precautions and loss control advice on how to avoid accidents that could result in claims.

In interviews I conducted between 2013 and 2020, 35 insurance professionals—agents, brokers, underwriters, loss control specialists, and adjusters—described how they use these and other techniques to reduce the risk of food safety failures on farms that grow fresh produce.

Farmers usually purchase some form of insurance that includes liability coverage for foodborne illness outbreaks. For small farms, this liability coverage is bundled into a farm insurance package, which includes some combination of coverage for farm dwelling, household personal property, farm machinery and equipment, farm structures, and farm produce and supplies—and may also include auto coverage . Larger farms, like other business entities, usually carry what is known as commercial general liability coverage, which can be sold separately or as part of a business owner policy.

Insurance professionals use various techniques to help farmers reduce the risk of contamination in their operations. For example, insurers use premiums to motivate farmers to pay more attention to food safety issues. One insurer explained that if insurers see an area where a farmer is lagging in safety, their insurers will “apply pricing charges” until changes are made and then “remove them to make the premium more attractive”.

In addition to offering price incentives, insurance service professionals also provide policyholders with food safety management advice. According to a second contractor, making recommendations to farmers about risk management strategies “helps us avoid losses, but also helps them be the best they can be in their business”.

As a compliance mechanism, insurance has a significant advantage over government regulations. Resource constraints hinder insurance less than they do for publicly funded surveillance. For a government agency, the expansion of inspections is putting increasing pressure on a tight budget. Conversely, as the market for insurance coverage grows, companies collect more premiums than they fund inspections. For insurers, the growing demand for inspections provides new revenue to pay them. Consequently, the ability of insurance companies to oversee food safety on farms far exceeds that of government agencies.

Insurance also has an advantage over the most common form of privately funded oversight in the fresh produce sector—private third-party food safety audits paid for by growers. The conflict of interest that arises when producers pay for controls jeopardizes the integrity of those controls and undermines confidence in them. Although growers also pay for underwriting inspections, insurance companies have a strong incentive to ensure these inspections are rigorous because the insurer is responsible for the cost of any food safety failure. This business model for insurance companies includes incentives for rigor and reliability that are absent from private third-party food safety audits paid for by growers.

Insurance as a tool to incentivize farmers to comply with food safety regulations is not yet widespread. Providing risk management advice to farmers requires an investment of time on the part of insurance company professionals that most farm finance contracts cannot support. Accordingly, the types of risk reduction strategies described here have been primarily associated with larger, high-premium farm business policies. They are not common among insurers of medium and small farms, as the owners of these farms can afford to buy cheap insurance.

Additional research might explore ways to organize risk pools among small and medium-sized growers, or to provide government subsidies to purchase insurance, as is currently done with crop insurance. This approach can support higher insurance premiums and the proliferation of insurers’ efforts to help manage food safety risks.

In time, food safety liability insurance coverage can become a model for other areas of the food industry.

Timothy D. Lytton is Distinguished University Professor and Professor of Law at Georgia State University College of Law.

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