Using 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 virulent microbial pathogens in growing fields and packing houses are causing many of the nation’s largest and deadliest outbreaks.

Federal regulations developed over the past few 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 to monitor the more than 120,000 US farms that grow fresh produce.

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

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

Pooled risk insurance protects policyholders from the potentially devastating financial consequences of unexpected claims. One disadvantage of insurance is that by relieving policyholders of financial responsibility for accidents, insurance eliminates an important incentive for them to exercise care, which can increase the risk of accidents. Economists call this the moral hazard problem.

To address this problem, insurance providers often create new incentives for policyholders to reduce risk. Numerous insurance case studies describe how insurers use various 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 lead to 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 in farms that grow fresh produce.

Farmers typically purchase some form of insurance that includes liability coverage for foodborne disease outbreaks. For small farms, this liability coverage is included in a farm insurance package that includes some combination of coverage for farm housing, household personal property, farm machinery and equipment, farm structures, and farm products and supplies—and may also include car cover. 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 operator’s policy.

Insurance professionals use a variety of techniques to help farmers reduce the risk of contamination in their operations. For example, insurers use premiums to get farmers to pay more attention to food safety issues. One insurer explained that if insurers see an area where a farmer is not meeting safety requirements, their insurers will “apply price debits” until changes are made and then “remove them to make the premium more attractive “.

In addition to offering price incentives, insurance professionals also provide their insured with food safety management advice. According to a second insurer, making recommendations to farmers about risk management strategies “helps us not have losses, but also helps them be the best they can be in their business.”

As a compliance mechanism, insurance has an important advantage over government regulation. Resource constraints hinder insurance less than they do for publicly funded surveillance. For one state agency, the expansion of inspections is putting an increasing strain on a limited budget. In contrast, as the market for insurance coverage grows, companies collect more premiums from which to fund inspections. For insurers, the growing demand for inspections provides new revenue to pay for them. Consequently, the capacity of insurance companies to monitor food safety on farms far exceeds that of government agencies.

The insurance also takes precedence over the most common form of privately funded oversight in the fresh produce sector – private third-party food safety audits paid for by producers. The conflict of interest that arises when manufacturers pay for audits compromises the integrity of those audits and undermines their credibility. Although producers also pay for insurance inspections, insurance companies have a powerful incentive to ensure that these inspections are rigorous because the insurer is responsible for the costs of any food safety failure. This business model for insurance companies includes incentives for rigor and reliability that are absent from third-party private food safety audits paid for by manufacturers.

Insurance as a tool to create incentives for 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 professionals that most low-cost farm policies cannot cover. Therefore, the types of risk mitigation strategies described here are primarily associated with larger agribusiness policies with high premiums. They are not common among insurers of medium and small farms, because the owners of these farms can only afford to buy cheap insurance.

Additional research could explore ways to organize risk pools among small and medium producers or provide them with government subsidies to purchase insurance, as is currently done with crop insurance. This approach could support higher premiums and increased efforts by insurers to help manage food safety risks.

In time, food safety liability insurance coverage may provide a model for other sectors 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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