Food Distributor Insurance Gaps: Recall and Spoilage

Many standard forms leave out or limit six things a food distributor runs into: product recall, spoiled stock, most pollution, truck claims that general liability will not take, other people's goods in your care and, for alcohol sellers, liquor claims. An inherited program may not include cover for them, because the seller's operation may not have needed it or the program may have been built for a different business. This guide is for a buyer who closed on a food distributor and wants to find each gap on the paperwork, see why it exists and know what to ask for. It also names the scary items, such as a lost customer or a pension bill, that no policy answers. The core policies are in the first guide in this set.

The short answer

Many standard liability forms exclude recall of products, damage to your own product, most pollution and auto claims, and liquor claims for a business that distributes alcohol. Each needs its own answer.
Spoilage is usually an endorsement, not part of a basic property policy, and the scheduled causes decide whether a freezer failure or a power outage is covered.
A supplier's vendors endorsement can help but has exclusions, including for product you repackage or relabel.
Some problems are not insurance gaps at all: losing a big customer, a pension withdrawal bill or an unpaid produce trust claim.
Ask for each answer in writing as one of four words: covered, limited, excluded or not available.

Where do standard policies leave a food distributor exposed?

Use this table as a search guide through the declarations pages and endorsement lists you inherited. Each row names a gap, why the standard form leaves it, and what to ask.

Common gaps in a food distributor program
Gap	Why it exists	How to spot it and what to ask
Product recall cost	Standard liability pays for injury or damage others suffer, not for retrieving a product. Recall is a separate coverage	Look for a recall or contamination coverage part. Ask whether it is available to a distributor and what triggers it
Spoiled stock	Basic property forms do not automatically cover perishable stock. Spoilage is an optional endorsement with its own limit and deductible	Find the spoilage line. Check which causes are scheduled (breakdown or contamination, power outage) and whether stock held for others is included
Pollution	General liability excludes most pollution. Ammonia refrigeration can add federal process safety rules (see the note under the table)	Ask what refrigerant the site uses and how much it holds, whether any pollution policy exists, and who holds the safety plan records
Auto claims	The general liability form excludes autos, including loading and unloading	Confirm business auto lists every unit. Ask about hired and non-owned auto for rented trucks and for staff using their own cars on errands
Stock on trucks and trailers, and spoilage from a failed refrigeration unit on a route	Property forms often limit or exclude stock away from the premises, and spoilage endorsements are written for the described premises. Transit and vehicle cover sit on separate forms	Ask whether stock in transit, trailers parked in the yard and refrigeration units are scheduled, the per-vehicle limit, and whether spoilage on a route is included. Ask whether customers' goods on your trucks are covered
Customers' goods	Property, liability and auto policies usually leave out other people's property in your care, custody or control	Ask whether you store or haul for others. If so, look for warehouse legal liability, bailee or cargo cover
Liquor	Many liability forms exclude liquor claims for a business that distributes alcohol, and wording and court treatment vary	Matters only if you wholesale beer, wine or spirits. Ask for liquor liability and check state permits
Payments by a tricked employee	Crime forms are written differently. Cover for payments an employee is tricked into making may be limited, excluded or available only by endorsement	Ask whether the crime policy covers payments made after a fake invoice or a spoofed email, and what the sublimit is
Income lost when a supplier's or customer's site is damaged	Business income responds to damage at your premises. An extension for other locations is optional and varies by carrier	Ask whether a dependent property endorsement is available and on what terms

On ammonia, the Occupational Safety and Health Administration's (OSHA) Process Safety Management (PSM) standard and the Environmental Protection Agency's (EPA) Risk Management Program (RMP) both use a 10,000 pound threshold for anhydrous ammonia in a process (PSM at or above it, RMP above it). A larger system may fall under one or both, subject to exemptions. Whether either reaches your site is a site fact, and EPA has proposed changes to its rule.

The library has basics on liquor liability and on inland marine cover for equipment and goods in transit. For the wider pattern of exclusions, see exclusions that quietly kill coverage.

What if a supplier recalls something you already delivered?

A hypothetical example. A manufacturer announces a recall of a frozen product that the distributor delivered to about 150 restaurants and stores over six weeks. The distributor has to find the product, pull it, notify customers and answer questions about illness. The new owner asks:

Does the distributor's own program include recall cover, or does the general liability recall exclusion apply?
Does the distributor hold a vendors endorsement on the manufacturer's liability policy, and is this product on its schedule?
Did the distributor repackage, relabel or blend any of the recalled product?
Is the distributor the registered facility that must report to the U.S. Food and Drug Administration (FDA)? That is a question for counsel.
Who pays for pulling product back from customers, and does any policy respond if a customer claims its own losses?

A vendors endorsement generally covers injury or damage arising from scheduled products you sell in your regular business, and its exclusions can bite a distributor that repackages or relabels product. The contracts guide lists them. Under the Reportable Food Registry, the registered facility's responsible party must report to FDA within 24 hours of determining that a food is reportable, meaning there is a reasonable probability it will cause serious adverse health consequences or death. Whether that applies to a given recall is a question for counsel.

Insurance may answer only part of this. The supply agreement and customer terms decide much of the rest, so a recall is not an insurance-only event.

Which gaps come from the deal rather than the policy form?

Some gaps are created by how the business changed hands. These are the ones to check first, because a clean form does not help if the wrong entity or the wrong trucks are on it.

Wrong named insured. In an asset purchase the policies list the seller's entity, which cannot simply hand them over, so your new company usually needs its own policies bound at closing. See wrong named insured after an acquisition.
Stale schedules. Trucks, drivers or addresses that no longer match the business. See removing vehicles, drivers and equipment.
Products sold before closing. The standard Insurance Services Office (ISO) general liability form defines "your product" to include goods sold by a business whose assets you acquired, and many carrier forms follow it. That wording does not decide whether you are legally liable for the seller's older products, which depends on deal structure, state law and the carrier. Some states apply a product line rule and others do not, so ask counsel. The seller's older occurrence policies (policies that respond based on when the injury happened) protect the seller as named insured. Whether you, as buyer, can use them depends on deal structure, state law and the insurer's consent, so ask counsel and the carrier. Read successor liability in an asset purchase and who covers old claims in a stock or asset deal.
Inherited injury history. The seller's workers' comp experience generally follows the business under National Council on Compensation Insurance (NCCI) rules. See workers' comp and payroll for a food distributor.

Does your lender's insurance list match what is really in the warehouse?

For a Small Business Administration (SBA) 7(a) loan over $50,000, the lender's rulebook requires hazard insurance on pledged assets, including inventory and equipment, with a lender's loss payable clause. The loan basics are in the first guide. A distributor's stock is both the collateral and a number that swings through the year.

Two checks help. First, ask how the property form applies coinsurance, which reduces a claim when the limit is lower than a set share of the property's value at the time of loss. A limit set from a quiet month can fall short at a peak. A purchase price or book value is not the same as insurable value. Second, ask whether the form can adjust for seasonal peaks in stock. Your lender may also ask for more than SBA's minimum. See SBA lender insurance requirements.

Which problems look like coverage gaps but are really deal or business problems?

Many of the scariest items on a diligence list are not answered by standard insurance. Naming them early keeps you from paying for cover that does not exist and from missing the person who can actually help.

Problems insurance does not answer
Problem	Why insurance does not answer it	Who does
A large customer leaves after the ownership change	Business income insurance responds to physical damage at your premises from a covered cause, not to losing a customer	Contract terms, deal counsel and your investor update
An unpaid produce supplier sends a written trust notice	Under the federal produce statute, produce, products made from it and the proceeds can be held in trust for unpaid sellers. A payment dispute is not an insured claim	Counsel, your lender and treasury. See contracts, licenses and bonds
Leaving an underfunded union pension fund that several employers pay into (a multiemployer plan)	Withdrawal liability (the bill for leaving the fund) is a statutory debt, and an asset sale can avoid triggering it only if specific conditions are met	Deal counsel, an actuary and the plan
A route driver says overtime was never paid	Employment practices policies often limit or exclude wage and hour claims, so ask. An asset buyer can face the seller's federal wage claims in some cases	Counsel and the seller indemnity. See inherited wage and hour exposure

How do you close a gap without overbuying?

List the gaps that apply to your operation using the first table. Skip liquor if you do not sell alcohol.
Size each one by the worst plausible loss and how likely it is, in dollars your lender and investors would feel.
Ask for quotes that show limits, sublimits and deductibles separately, and ask the broker to answer each gap in writing as covered, limited, excluded or not available.
Decide what to retain on purpose, and note it for your investors and lender.
Re-check at renewal, because a new product line, a new truck or a new customer contract can reopen a gap.

Morrow can map your declarations pages to the gap table, flag what is missing and request quotes. Any new terms depend on carrier underwriting. To compare the gap work with what cutting cost can do, see lowering premium without cutting coverage.

Keep reading

Frequently asked questions

Does my general liability policy cover a product recall?

As a rule, no. The standard liability form excludes recall of products and damage to your own product, and recall cover is a separate policy or endorsement. Ask your broker whether it is available to a distributor and what triggers it.

If the power goes out and my freezer thaws, is the spoiled food covered?

It depends on the spoilage endorsement. Some schedule equipment breakdown and power outage as separate causes, and the schedule shows which are turned on. Read the schedule, the limit and the deductible, and ask whether an outage off your premises counts.

Does business income insurance cover losing my biggest customer?

No. Business income insurance responds to physical damage to your property from a covered cause. Losing a customer or a license is a business risk that insurance does not answer.

Am I protected if my supplier adds me as an additional insured?

Possibly in part. A vendors endorsement on a manufacturer's policy can cover you for injury arising from scheduled products, but its exclusions can reach product you repackage or relabel. Ask for a copy of the endorsement, not just a certificate, and see the contracts guide for the usual exclusions.

A produce supplier says I owe it money and mentioned a trust. Is that an insurance claim?

No. Under the federal produce statute, produce, products made from it and the sales proceeds can be held in trust for unpaid sellers, and a payment dispute is not an insured claim. Tell your counsel and your lender early.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Gaps in the Food Distributor Insurance You Inherited