Insurers 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 growing fields and packinghouses are responsible for 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 may come from a surprising source: the insurance industry.
A recently published mine study documents new efforts by insurers to monitor and enforce compliance with food safety standards on farms. These efforts, if successfully scaled up, could transform the U.S. food safety system not only on farms, but throughout the food industry.
Insurance pools risks to protect policyholders from the potentially devastating financial consequences of unexpected losses. One disadvantage of insurance is that by relieving policyholders of financial responsibility in the event of accidents, insurance removes an important incentive for them to be careful, which can increase the risk of accidents. Economists call this the moral hazard problem.
To address this issue, insurers often create new incentives for policyholders to reduce risk. Numerous insurance case studies have described how insurers use various techniques to reduce risk. These methods include premium discounts for policyholders who take precautions and loss management 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 management specialists, and adjusters) described how they use these and other techniques to reduce the risk of food safety failures on farms growing fresh produce. .
Farmers typically purchase some form of insurance that covers liability for foodborne disease outbreaks. For small farms, this liability insurance is bundled with a farm insurance package that includes some combination of farm housing, household personal property, 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’s called commercial general liability insurance, which can be sold separately or as part of a business owner’s policy.
Insurance professionals use a variety of techniques to help farmers reduce the risk of contamination in their operations. For example, insurers use insurance premiums to encourage farmers to pay more attention to food safety issues. One insurer explained that when insurers see an area where a farmer is underinsured, their insurers apply price debits until changes are made and then remove them to make premiums more attractive.
In addition to offering price discounts, insurance specialists also advise their insured on food safety. According to another insurer, advising farmers on risk management strategies “helps us avoid losses, but helps them be the best in their business.
As a compliance mechanism, insurance has a significant advantage over government regulation. Resource constraints are less of a barrier to insurance than publicly funded surveillance. For a government agency, expanding controls place an ever-increasing strain on a limited budget. Conversely, as the market for insurance coverage grows, companies collect more premiums to fund inspections. For insurers, the growing demand for inspections provides new revenue to pay for them. Consequently, the ability of insurance companies to monitor farm food safety far exceeds that of government agencies.
The insurance also has an advantage over the most common 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 growers pay for audits compromises the integrity of these audits and undermines confidence in them. Although growers also pay for insurance inspections, insurance companies have a strong incentive to enforce these inspections because the insurer is responsible for food safety violations. This business model for insurance companies includes incentives for rigor and credibility 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. Advising farmers on risk management requires a time investment from insurance professionals that most low-cost agricultural policies do not support. Consequently, the types of risk mitigation strategies described here have been associated primarily with larger, high-reward agricultural policies. They are not common among insurers of medium and small farms, because the owners of these farms can only afford cheap insurance.
Additional research could explore ways to organize risk pools among small and medium-sized growers or provide them with government subsidies to purchase insurance, as is currently done with crop insurance. This approach can support higher insurance premiums and insurers’ efforts to manage food safety risks.
Over time, food safety liability insurance can set an example for other sectors of the food industry.
Timothy D. Lytton is a Distinguished University Professor and Professor of Law at Georgia State University College of Law.
