Using insurance to regulate food safety

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

Foodborne diseases are 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 grow fields and packhouses are causing many of the country’s largest and deadliest outbreaks.

Federal regulations developed in recent years have set tough new standards to improve food safety on farms. The US Food and Drug Administration is responsible for enforcing these regulations, but does not have the inspection resources needed to oversee the more than 120,000 US farms that grow fresh produce.

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

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

Insurance companies bundle risks to protect policyholders from the potentially ruinous financial consequences of unexpected losses. A disadvantage of insurance is that by relieving policyholders of the financial responsibility for accidents, policyholders remove an important incentive to be diligent that 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 damage 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, insurers, loss control specialists, and surveyors—described how they use these and other techniques to reduce the risk of food safety deficiencies on farms that grow fresh produce .

Farmers typically purchase some form of insurance that includes liability coverage for foodborne outbreaks. For small farms, this liability insurance is bundled into an agricultural insurance package that includes a combination of coverage for a farm dwelling, household personal effects, farm machinery and equipment, farm structures, and farm products and supplies—and may also include auto insurance. Larger farms, like other businesses, usually have what is called commercial general liability insurance, which can be sold separately or as part of a business policy.

Insurance experts use various techniques to help farmers reduce the risk of contamination on their farms. For example, insurers use premiums to persuade farmers to pay more attention to food safety issues. One insurer explained that when insurers see an area where a farmer is failing to meet security, they “make price deductions” until changes are made, then “remove them to make the premium more attractive”.

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

As a compliance mechanism, insurance has an important advantage over government regulation. Scarcity of resources hinders insurance less than publicly funded supervision. For a government agency, the expansion of inspections puts an increasing strain on a limited budget. In contrast, companies with a growing market for insurance cover take more premiums to finance inspections. For insurers, the increasing demand for inspections provides new revenue to pay for. As a result, the capacity of insurance companies to monitor 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 the growers. The conflict of interest that arises when producers pay for audits jeopardizes the integrity of those audits and undermines trust in them. Although growers also pay for underwriting inspections, insurance companies have a strong incentive to ensure these inspections are rigorous as the insurer is liable for the cost of a food safety failure. This business model for insurance companies includes incentives for rigor and reliability that private third-party food safety inspections paid for by producers lack.

Insurance as a tool to incentivize farmers to comply with food safety regulations is not yet widespread. Advising farmers on risk management requires insurance professionals to invest time that most low-cost agricultural policies cannot afford. Consequently, the types of risk mitigation strategies described here have been primarily associated with larger, high-premium agribusiness policies. They are not common among insurers of medium and small farms, as the owners of these farms can only afford to take out cheap insurance.

Additional research could explore ways to organize risk pools among small and medium-sized growers or provide them with government subsidies for purchasing insurance, as is currently the case for crop insurance. This approach could support higher premiums and expanding efforts by insurers to address food safety risks.

Over time, food safety liability insurance could become 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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