Spoilage and Contamination Insurance

Food products are the first thing that comes to mind when we think of spoilage and contamination. However, there are many businesses that have significant inventories of perishable items, including grocery stores, cold storage warehouses, bakeries, food processing plants, and even less obvious operations like pharmacies, cigar stores, florists and doctor’s offices.

A perishable is a fresh food or another item — not always a consumable — that requires controlled storage for safety and quality, such as dairy, produce, meat, frozen items, medicines, plants and flowers. It does not include shelf-stable items such as canned goods, pasta, or other products that do not require consistent temperature or humidity.

Any business with a large amount of perishable stock should consider adding spoilage and contamination insurance to its insurance plan.

What Are Contamination and Spoilage?

Spoilage and contamination insurance helps businesses pay for costs associated with perishables that are spoiled or contaminated in any type of event specified in the insurance policy. However, it does not include product contamination at the source of production. For example, if a manufacturer of a drug or consumable allows metal shards or an unwanted substance to fall into a mixing vat, the loss would not be covered.

There are usually specific events, or “named perils,” that will trigger spoilage or contamination coverage. The two primary perils are extended power outages and equipment breakdowns. These can cause a change in temperature or humidity that ruins products or a leak of refrigerants or other damaging substances onto perishables.

Coverage can include the cost of the inventory itself and loss of profits, as well as potential legal fees and liability damages if spoiled inventory harms a consumer. If a government agency shuts your business down following a contamination incident, some policies will even cover:

  • Required equipment cleaning after the incident
  • Medical expenses or vaccinations for employees or other exposed individuals
  • Loss of income during the shutdown
  • Professional services or advertising to help repair your business’s reputation

The payout limits and perils covered will differ based on your policy choices and the company that issues it, so be sure to review the details with your insurance professional.

All power outages are not the same

A spoilage and contamination policy will have parameters that define what’s accepted as a covered “power outage.”

  • A typical policy will not cover loss of power due to accidental disconnection from a power source. For example, failing to plug a power cord back in after someone trips on it would not be insured.
  • Intentional deactivation of electricity is also excluded. This might be done during construction or repair, or because the business has failed to pay its electric bill.
  • If your building or business space simply lacks sufficient power to operate the equipment in question, this “outage” would not be covered.
  • If the power loss is due to a government order or national fuel shortage, any resulting claims would be denied.

Adding spoilage and contamination to your policy

Spoilage and contamination insurance can be added to a business owner’s policy (BOP) or commercial property policy. It is often included in equipment breakdown insurance, though that coverage requires a mechanical failure of the appliance or system for it to respond. If you have equipment breakdown insurance, check the policy carefully for spoilage and contamination details.

A program policy or BOP tailored to your industry may include specific coverage for spoilage and contamination of perishable inventory. But talk to your agent or broker about the limits of coverage. Policies generally have one amount for an occurrence and another total amount, the aggregate, for the entire term of your policy — typically a year’s time.

If you have large amounts of inventory or high-value perishable stock, verify that your occurrence payout limit is high enough to cover the financial hit if you lose all your inventory from a single event.

If you are adding spoilage and contamination as an endorsement to your commercial property policy, make sure it dovetails with your other coverages, such as business interruption insurance, equipment breakdown coverage, and product liability or foodborne illness. Your agent or broker can help you fine-tune your whole insurance suite so you have a good blend of complementary coverages.

Other Spoilage and Contamination Details

Additional variables are helpful to understand when choosing spoilage and contamination insurance.

  • Most spoilage and contamination policies either require a refrigeration maintenance agreement or give a premium discount to businesses that have one. This agreement is made directly between the policyholder and an approved refrigeration or equipment maintenance company. It must be in effect throughout the policy period, and you should expect to be asked for proof of regular service when you file a claim. If the maintenance agreement is terminated or lapses for any reason, you may lose coverage.
  • When you select your policy, remember that it will have its own limits and deductibles, separate from your primary commercial property insurance. If you can supply perishable inventory records, this will be useful information for setting appropriate coverage amounts.
  • Some policies separate spoilage protection from contamination protection so you have the flexibility to select just one or the other, or a combination of both at different limits. This can be a useful feature for businesses that face more exposure in one area than the other. As an example, a florist is at much greater risk for spoilage than contamination.
  • When choosing limits and coverage, you’ll be asked if you want damages paid based on the “selling price.” Just as the term implies, this takes into account your retail markups and the value added to your perishables as you transform them through recipes, presentation, design or other creative applications.

There are additional options that may apply to the spoilage and contamination policy you select. Working with an insurance professional who is well versed in your business will allow you to get advice tailored to your unique needs, and avoid gaps and duplication of coverages.