Module 8: Managing Liability and Risk · 2017-12-04 · • Nametags, pens Preparation needed: •...

N.C. MarketReady Fresh Produce Safety Field to Family V.1, 2009 8.1

Acknowledgments

Rod M. Rejesus, Assistant Professor and Extension Specialist Department of Agricultural and Resource Economics, N.C. State University

Theodore A. Feitshans, J.D., Lecturer and Extension SpecialistDepartment of Agricultural and Resource Economics, N.C. State University

Annette Dunlap, formerly Extension Associate, N.C. State University

Module 8: Managing Liability and Risk

8.2 GAPs Training Initiative — Module 8: Managing Liability and Risk

Module 8: Managing Liability and Risk

Estimated duration: 2 hours

Instructional goal: • Raisegrowers’awarenessofliabilityissuesrelatedtogrowingfreshproduceformarket,andprovide

themwithabasicunderstandingofrisk-managementtools.

Instructional objectives: Enableparticipantstoassesstheiroverallrisksandmakeinformeddecisionsregarding:• economicvalueofobtainingGoodAgriculturalPractices(GAPs)certification• risksassociatedwithmarketopportunities• liabilityexposureoftheiroperations• adequacyoftheirinsurancecoverage.

Equipment, supplies, and materials needed: • LaptopandLCDprojector• PowerPoint(PPT)presentationonCD• Nametags,pens

Preparation needed: • Ifanoutbreakofafood-bornediseaserelatedtofreshproduceoccursatthetimeofthis

presentation,itmaybehelpfulforthepresentertoreviewcurrentreportsprovidedbyatrustedsource,suchasN.C.DepartmentofAgricultureandConsumerServices(NCDA&CS),U.S.FoodandDrugAdministration(FDA)orCentersforDiseaseControl(CDC).

• PresentermayalsowanttochecktheU.S.DepartmentofAgricultureorFDAwebsitestoseeifreportsoncausesand/oreconomicimpactofpreviousoutbreaksoffood-bornediseaserelatedtofreshproducehavebeenmadeavailable.

• ReviewModule8andPPT8priortothedayoftheworkshop.• BecomefamiliarwithGAPsprogramming,howeachmoduleisanintegralpartoftheother

modules.• Arrangeroomforoptimalparticipation.• SecurealaptopcomputerwithPowerPointcapabilityandLCDprojector.Saveacopyofthe

PowerPointpresentation(onCD)oncomputer.Makecopiesofcasestudies,relevantauditexamplesandpost-testforallparticipants.

• Prepareroomtoaccommodateparticipantsandprojector.Havesign-insheetandnametags,asapplicable.


Module 8

WelcomeHaveparticipantsmakenametagsandintroducethemselves

PPT 8-1: Module 8: Managing Liability and Risk

Use Module 8 PPT to lead class discussion; have PPT8-1onscreenasclassbegins.

This material assists the grower in making informedbusinessdecisionsabouttheeconomicvalueofobtainingGAPscertification.

Information covered includes:• cost/benefitanalysisofGAPscertification• historiccost/benefitcasestudiesofGAPs

certifiedoperations’performancefollowingoutbreaksoffreshproducefood-borneillness

• liability“primer”—explanationofliabilityasitrelates to fresh produce

• insurance“primer”—overviewoftypesofinsurance and North Carolina insurance regulations(i.e.,“Areyoureallycovered?”):

• generalfarmliability• productliability(includingcontaminationand

malicioustampering)• productrecall.

PPT 8-2: Learners’ Objectives


PPT 8-3: IntroductionBenefits and Costs of Third-party GAPs Cer-tificationWithincreasedconcernsaboutpotentialout-

breaksoffood-borneillnessfromeatingfreshproduce(andtheattendanteconomic/financiallossesfromtheseoutbreaks),manygrowershavevoluntarilyadoptedGAPstominimizetheprob-abilityofmicrobialcontaminationontheirfarmsandimprovetheirfood-safetysystems.

PPT 8-4: Economic Benefits of GAPs Certi-fication(1) Reduced Economic Risks Reducedriskofhavinganoutbreakoriginate

from the farm.GAPsadoptionandcertificationisnota

100-percentguaranteeoffoodsafety.Itonlyreducestheriskorprobabilityofanout-

break.Theriskofeconomiclosses(catastrophicdrop

insales,damagetoreputation,potentiallawsuits)canbereduced.

Calculate potential economic loss with and withoutGAPs.Weighthelossbasedontheprob-abilityofhavinganoutbreak(ownperceptions).Positive/negativeexternalityeffecttothefresh-

produceindustryofbeingGAPsornon-GAPscertified.

PPT 8-3 (continued)However,theuseofGAPspersewillnotmakeadifferenceinconsumerdemandforfreshproduceif

thesegrowersdonoteffectivelysignaltobuyersthattheyhavetakensteps(i.e.,GAPs)toimprovetheirfarms’food-safetysystem.Inmostcases,consumersfinditdifficult(orimpossible)totelliffreshpro-duceisgrownwithGAPsornot.Thebuyer,inthiscase,faceswhateconomistscallan“asymmetricin-formation”problemwhereheorshedoesnothaveinformationaboutthesafetyofthefreshproduce.Oneincreasinglyimportantapproachtoaddressthisproblemistheuseofthird-partyGAPscertifi-

cationtoindicatetoconsumers/buyersthatappropriatefood-safetypracticesareinplaceatthefarmduringtheproductionprocess.Sincethird-partyGAPscertificationisvoluntary(andnotyetmandatedbylaw),growersneedtodeterminewhetherornottousethiscertificationprocessintheiroperationbyweighingitseconomicbenefitsandcosts.


PPT 8-4 (continued)Theoutbreakdoesn’tjustaffectthefarmwheretheoutbreakoriginatedbutalsoaffectsallgrowers

(regardlessofwhetherGAPsarecertifiedornot).

(2) Improved Market-Access OpportunitiesManyretailersandotherbuyersrequirethird-partyGAPscertificationasaconditionofpurchase:

• Safeway• FruitandvegetableshippersHavingthird-partycertifiersgivesthefarmscredibility.

Additional Information: TherearetwomainbenefitstoGAPsadoptionandcertification:(1)reducedeconomicrisk,and(2)

improvedmarket-accessopportunities.

Reduced Economic Risk WhenafarmappropriatelyimplementsGAPsandgetscertifiedbyathirdparty,onedirectbenefit

tothefarmeristhereducedriskofhavingafood-bornediseaseoriginatefromthefarm.Note,how-ever,thatGAPsadoptionandcertificationdonotguaranteefoodsafety(i.e.,theydonotcompletelyeliminatetheriskofcontaminationoroutbreak).Theyonlyreducethisrisk.Asuccessfulcertificationissimply an informed opinion on the state of farm operations at a particular point in time as they relate to food safety.

Nevertheless, the risk of economic lossesassociatedwithanoutbreakofafood-borneillnessisalsoreducedwithGAPsadoptionandcertification,giventhattheprobabilityofhavinganoutbreakisreduced.Theriskoflargeeconomiclossesduetoanoutbreak—suchasacatastrophicdropinsales(es-peciallyifcontaminatedproduceistracedtothefarmoperation),damageinfarmandfarmerreputa-tion,andpotentiallawsuits—isreducedwithGAPsadoptionandcertification.However,thesebenefits(i.e.,theeconomiclossesavoided)onlyaccruetothegrowerintheeventofanoutbreak.Hence,toestimatemoreaccuratelythebenefitsofreducedeconomicriskasaresultofhavingGAPscertification,agrowerneedstocomparethefarm’spotentialeconomiclosseswithandwithoutsuchcertification.Untilanoutbreakoccurs,however,growerstypicallythinkthattheprobabilityofhavinganoutbreakandgettingtheeconomicbenefitsofGAPscertificationisverylow.Sincegettinganaccurateestimateofthe“probability”ofanoutbreakispracticallyimpossible,calculatingthereductionofeconomicriskasaresultofGAPscertificationoftendependsonthegrowers’ownperceptionoftheprobabilityofanoutbreak.Anotherimportant,butsubtle,benefitofthird-partyGAPsadoptionandcertificationiswhatecono-

mistscallthe“positiveexternality”effecttothewholefresh-produceindustry.Whenanoutbreakoffood-borneillnessoccurs,theindividualgrowerwhoseproducewascontaminatedisnottheonlyoneaffected.Allgrowersoffreshproducesuffer.Hence,ifaproducerusesGAPsandgetscertified,heorshenotonlyreduceshisownriskofsufferinglossesbutalsoreducestheriskofeconomiclossesforothergrowersintheindustry(whethertheybeGAPsornon-GAPscertified).Incontrast,ifagrowerdoesnotadoptGAPsanddoesnotgetcertified,whenanoutbreakgetstracedbacktohisorherfarm,notonlywillthenon-compliantproducersufferbutalsothewholeproduceindustry—a“negativeexternality”effect.ForgrowersconsideringGAPsadoptionandcertification,itisimportanttorealizethattheyareprovidingapositiveexternalitybenefittothefreshproduceindustrywhentheyeventuallydecidetouseGAPs.

Improved Market Access OpportunitiesAmoreimmediateeconomicbenefitofGAPsadoptionandthird-partycertificationistheimproved

opportunitiesformarketaccess.GAPscertificationopensmarketsforproducerstoexpandsalestomajorsupermarketchains,schoolsystemsandrestaurants.Manyretailersandfood-servicebuyersnow


PPT 8-5: Economic Costs of GAPs Certifica-tion

Economic CostsWeighingagainstthepotentialbenefitsofGAPs

adoptionandcertificationarethecosts,whichare often immediate and sometimes large. When agrowerdecidestohaveathird-partyauditonhisorherfarm,thefirststepistoadoptorimple-mentGAPsintheproductionprocesstocom-plywithGAPscertificationsguidelines.CostsofadoptingtheseGAPsmayincludelargecapitalinvestmentsforwater-purificationequipment,for example. Such costs may also include more moderate expenditures such as worker training intended to improve hygiene, and the upgrad-ingofrecord-keepingtechnologies.Notethatthereisno“one-sizefitsall”setofpracticesthatallowgrowerstobeautomaticallyGAPscertified.Growershavetheleewaytochoosethemostcost-effectivecombinationofpracticestosatisfyGAPscertificationrequirements.Therefore,twogrowers

requirethird-partycertificationofagrower’scompliancetoGAPsasaconditionofpurchase.Thus,hav-ingaGAPscertificationgivesgrowersbroadermarketaccess(Calvin,2003).In1999,forexample,Safeway,thethirdlargestU.S.foodretailer,expandeditsfoodsafetyprogram

torequireallitssuppliersofcertainfoodcommoditiestoverifythattheyfollowgovernmentfood-safetystandardsandspecificationsinproductionandpacking.Somelargeretailershavefollowedsuit.ToqualifyasaSafewaysupplier,agrowermusthaveanindependentthird-partyauditorverifythatthegrowerisusingGAPsintheproductionprocess.RequiringverificationoftheuseofGAPswasanewideaatthattimeandmetinitialopposition.DomesticandimportedproducesoldbySafewaymustmeet the same standards.ResearchcoveringaselectgroupofU.S.fruitandvegetableshippersindicatesthatin1999,almost

halfofthosestudiedprovidedthird-partyauditsforGAPsforatleastoneoftheirbuyers.Whileshipperswerenotalwayshappyaboutcomplyingwiththisrequest,mostindicatedthattheywouldimplementverificationprogramsinresponsetochangingbuyerpreference(Calvinetal.,2001).Inthisstudy,shipperstriedtodistancethemselvesfromthosegrowerswithnothird-partyGAPscertification.Theseshippersrecognizethattheycanreduceriskbyrequiringgrowerstoprovidethird-partyauditsforGAPs.Hence,onlygrowerswiththistypeofthird-partycertificationcantakeadvantageofthemarketopportunitiesaffordedbytheseshippers.Anotherimportantaspectofusingthird-partyGAPsverifiersiscredibility.Whilegrowerscouldcon-

ceivablydotheirownfoodsafetyandGAPsaudits,third-partyauditsofGAPsbyreputablecompanies/individuals/groupsprovidealevelofadditionalcredibility.AnimportantissueforgrowersinthiscaseisfindingareputablethirdpartytodotheGAPscertification.Thereisnogovernmentoversightofthird-partyauditfirms—anissuethatconcernsmanyinthefreshproduceindustry(The Packer,2002).Standardsmayvarybetweentheauditingfirmsandbetweenretailersrequiringaudits.Hence,growersneedtobecarefulinchoosingthethird-partycertifiertogetthebenefitsofadditionalcredibilityandopportunities for improved market access. North Carolina growers should contact the N.C. Depart-mentofAgricultureandConsumerServicesforinformationaboutcrediblethird-partyauditors.Seetheend of this document for contact information.


PPT 8-5 (continued)indifferentareaswithdifferentenvironmentalconditionscouldbothadheretoGAPsprinciplesandbecertified,butusedifferentmethodstodoso.Anotherimportantimmediatecostofthird-partyGAPscertificationisthecostofhiringthethirdparty

toundertaketheGAPscertification.Typically,growershirethird-partyfirmsfirsttoevaluatethefood-safetysystemsintheiroperationsandthensuggestwaystomeetGAPsguidelines.In2001,anFDAre-portestimatedthecostofthird-partyGAPsevaluationat$300-$500perfarm(FDA,2001).Anevalua-tionwouldincludeareviewofthecurrentfood-safetysystemofthegrowerandanassessmentofwhatadditionalpracticesmightbeneededtoreducethechanceofcontamination,includingthedocumen-tationnecessarytoassurecontinuouscompliancewithGAPs.OncetheGAPshavebeenimplemented,growerscanthendecidetohavetheiroperationscertifiedbythirdpartiesand/orperiodicallyauditedtocheckforcompliance.In2001,FDAestimatedthatthetypicalcostofanaudit/certificationissimi-lartothecostofevaluation—$300-$500perfarm(FDA,2001).Admittedly,thesefiguresarealittlebitdatedbutthisgivesanideaoftheimmediatecertificationcostthatagrowermustpayifheorshewantsthird-partyGAPscertification.

PPT 8-6: Case Study: Spinach SpinachOnSeptember14,2006,theFDAannounced

thatconsumersshouldnoteatbaggedspinachbecauseofanoutbreakofillnessduetocon-taminationwiththepotentiallydeadlybacteriumEscherichia coliO157:H7(commonlycalledE. coli O157:H7).Storesandrestaurantsimmedi-atelyclearedbaggedspinachfromtheirshelvesand menus. Spinach harvesting and marketing ceased. There were no U.S. fresh spinach sales for fivedays,beforeFDAannouncedspinachfromsome areas was safe to consume. Spinach from the main production area of California was off the marketforanadditional10days.

PPT 8-6 (continued)Thecontaminationwaseventuallytracedtoaloadofspinachfromone2.8-acrefieldpackedatone

processingfacilityonAugust15.Thisfieldwaspartofa50.9-acreparceloflandleasedbyafirmforleafygreenproduction;theowneroftheranchusedtherestofthepropertyforgrazingcattle.Theleafygreensweregrownwithorganicmethods,butsincethefieldswereonlyinthesecond-yearofthethree-yeartransitiontoorganic,thespinachwassoldasconventional.Notethatorganicorconven-tionaloperationsmustaddressthethreatofmicrobialcontamination.AccordingtotheCaliforniaFoodEmergencyResponseteam,thegrowerdidnotcontractforathird-

partyauditforcompliancewithFDA’sGAPsfoodsafetyguidelinesbeforethe2006growingseasonbegan.Potentialenvironmentalriskfactorsatornearthefieldincludedthepresenceofwildpigsandirrigationwellsnearsurfacewaterwaysexposedtofecesfromcattleandwildlife.Theoutbreakstrainof E. coli O157:H7wasidentifiedinsamplesofriverwater,cattlefecesandwildpigfecesontheranch;theclosestcontaminatedsamplewasjustunderonemilefromthespinachfield.Buttheprecisemeansbywhichthebacteriaspreadtothespinachremainsunknown.


PPT 8-7: Case Study: SpinachOnSept.29,2006,FDAannouncedthat“spin-

achontheshelfisassafeasitwasbeforetheevent.”Salesbegantopickupafterwards,butrecoveryvariedbytypeofspinach—bunchedvs.bagged.InFigure1,weseethatbunchedspin-achreboundedfairlyquickly;inDecembership-mentvolumewashigherthaninDecemberofthepreviousyear(Calvin,2007).

PPT 8-8: Case Study: SpinachHowever,forthebagged-spinachsector,retail

salesrecoveredslowly.FortheperiodJan.24toFeb.24,2007,fivemonthsaftertheoutbreak,retailsalesvalueofbaggedspinachwasstilldown27percentfromthesameperiodtheyearbefore(Figure2),althoughthatwasmuchimprovedrelative to the low sales value immediately after theoutbreak.Dunlap(2007)alsoestimatedthatalthoughspinachpricesimprovedfromOct.2006toDec.2006,thepriceofspinachinDecember2006wasstill54.8percentlowerthanthepriceinthesamemonththeyearbefore.

PPT 8-9: Cast Study: Spinach—Market Out-comes

With the E. coli O157:H7outbreakinthefallof2006,itisimportanttonotethatallspinachgrowers suffered from the decreased consumer demand for their product, even though only one grower’sspinachwascontaminated(i.e.,theneg-ativeexternalityeffectdiscussedpreviously).Evenifotherspinachproducersusedthird-partyGAPscertification,theseGAPs-certifiedfarmerswerestillaffectedbytheoutbreak.However,onecanarguethattheseGAPs-certifiedproducerswouldnothavebeenaffectedasseverelybytheoutbreakand,presumably,wouldhaverecoveredmorequicklythannon-GAPs-certifiedspinachgrowers.Unfortunately,therearenoharddataavailabletovalidatethisclaim.ButgiventhatmanyCaliforniahandlersoffreshproduceinMarch2007agreed


PPT 8-10: Case Study: CantaloupesCantaloupesInMay2002,anoutbreakofSalmonella poona

in the United States and Canada was associated with Mexican cantaloupe shipped through McAl-len,Texas.Fifty-eightcaseswereidentified.Theimportingfirmimmediatelyissuedavoluntaryre-call.Thiswasthethirdseasonofoutbreakstracedto Southern Mexico.

PPT 8-11: Case Study: CantaloupesInOctober2002,FDAissuedanimportalert

against all cantaloupe imports from Mexico. AlthoughtheoutbreakshadbeentracedjusttotwostatesinSouthernMexico(MichoacanandGuerrero),FDAjustifiedthecountrywideimportalertbecauseofFDAsamplesshowingSalmonella contaminationfromotherstates(Sonora,Jalisco,Colima,Coahuila,MexicoandTamaulipas).Also,FDA was concerned that with a regional ap-proach,melonsfromrestrictedregionscouldbecommingled with melons from a nonrestricted area.

PPT 8-9 (continued)tobuyfreshproduceonlyfromgrowerswhofollowGAPs,theGAPs-certifiedspinachgrowerswouldhavebeenmoreabletoimmediatelytakeadvantageofthismarketopportunity.Non-GAPs-certifiedspinachgrowerswouldhavetakenalongertimetocomplywiththehandlers’GAPsrequirementandwouldhavesufferedmorefinancialorothereconomiclossesduetothisdelay.Thisshowsthemarket-accessbenefitsofhavingthird-partyGAPscertificationpriortoadiseaseoutbreak.


PPT 8-12: Case Study: CantaloupesForindividualMexicangrowerstoberemoved

from the countrywide import alert, individual farmers must formally petition FDA and provide documentationoftheirfood-safetypractices.Inresponse, the FDA will then conduct onsite in-spections of the growing and processing areas to auditthevalidityoftheinformationsubmitted.Inthisprocess,FDAgivesfirstprioritytogrowerswhohadtheiroperationsinspectedbyathird-party institution that has expertise in agricultural food-safetyprocesses.Note,however,thatathird-partyauditshowingcompliancewithGAPswillnotnecessarilybeenoughtoberemoved

PPT 8-13: Case Study: Green OnionsGreen OnionsOnNovember15,2003,FDAannouncedthat

HepatitisAoutbreaksinSeptemberinTennessee,NorthCarolinaandGeorgiawereassociatedwithraw or undercooked green onions. At that time, FDA reported that the green onions in the Tennes-seecase“appeared”tobefromMexico.Oneper-soninTennesseedied.OnNovember20,2003,FDA announced that green onions from Mexico wereimplicatedintheTennesseeandGeorgiaoutbreaks.FDAneverdeterminedthesourceofthegreenonionsassociatedwiththeoutbreakinNorthCarolina.InlateOctoberandearlyNovem-ber,beforeFDA’sfirstannouncementregardingcontaminated green onions, another very large outbreakofHepatitisAoccurredinPennsylvaniaamongdinersatonerestaurant.Morethan500peoplecontractedHepatitisAandthreedied(Datoetal.,2003).OnNovember21,FDAan-nouncedthatthisoutbreakwasalsoassociatedwith green onions from Mexico and named the fourfirmsthatgrewtheproductassociatedwiththeoutbreak.Identificationofthefourfirmswasbasedonepidemiologicalandtracebackevidence.

PPT 8-12 (continued)fromtheimportalert.Butgiventhatthird-partycertifiedgrowersaregivenpriority,thisagainsuggestthatGAPs-certifiedgrowersmayrecoverfasterfromtheeconomiclossesassociatedwiththeoutbreakthannon-GAPs-certifiedgrowers.GAPs-certifiedgrowerswouldbethefirstgrowerstobeinspectedbyFDA.Iftheypasstheinspection,thesegrowerswouldhavemarketaccessandwillhavethe“firstmover”advantageintheU.S.cantaloupemarket.ThiscaseagainreflectsthepotentialmarketaccessbenefitsofbeingGAPscertified.


PPT 8-14: Case Study: Green OnionsEventually, the FDA determined that the con-

taminated green onions came from Mexico. The FDAwasnotabletopindownexactlywheretheproducebecamecontaminated—atthefarm,packingshedorinthedistributionchain—asitmadeitswayintotheU.S.foodsystem.How-ever,theHepatitisAvirussequencesfromtheoutbreakstracedtoMexicowereidenticalorverysimilartosequencesfoundinsickpeoplelivingalongtheU.S.-MexicoborderorreturningfromvisitstoMexico.Buteventually,FDAnamedfourgrowers in Mexico as associated with the out-breaksandissuedanimportalert,orderingborderinspectors to reject all shipments of green onions

PPT 8-14 (continued)fromthesefirms.ThefourfirmsnamedbyFDAasassociatedwiththeoutbreakdidnothavethird-partyGAPScertificationfortheirsummeroperations(whichistheseasonwhenthecontaminatedgreenon-ionsweremostlikelyproduced).Soonaftertheoutbreaks,theFDAwenttoMexicotoinvestigatethesefourfarmsandonDecember9,2006,issuedapressreleaseoutliningthefood-safetyissuesthatmayhavecontributedtotheoutbreak—poorsanitation,inadequatehand-washingfacilities,questionsaboutworkerhealthandhygiene,thequalityofwaterusedinthefields,packingshedsandthemakingofice.OnDecember10,2003,thegreenonionpricefellby72percentcomparedtothepricetheday

beforetheFDAoutbreakannouncement(Calvin,AvendañoandSchwentesius,2004).Demand for greenonionsdroppedbecauseofconcernsaboutfoodsafety.SuppliesfromMexicodwindled.Pricesthenrosesteadilyfrom$5.73onDec.10to$11.73onDec.31,2003.TwoweeksaftertheHepatitisoutbreak,shipmentsofgreenonionsfromMexicoalsodecreasedby42percent.ShipmentsbegantoreboundduringthefirstweekofDecember2003andwereaboutat“normal”volumebytheendofthe month. Overall,theestimatedlossesforMexicangreenoniongrowerswas$10.5millionduetolostsales

andlowerpricesonactualsales(fortheperiodNov.16-29,2003).Growersincurredadditionallosseswhenfieldswentunharvestedduetolowdemand.InthelastweekofNovember,Mexicangrowersleft48hectaresofgreenonionsunharvested.InDecember,anadditional317acreswereleftunharvested.Greenonionfieldsareplantedeveryfewweekstoprovideacontinuoussupplyforharvest.Withthedeclineindemand,growersprobablycancelledsomeplannedplantings.Thedeclineinharvestre-sultedinadeclineindemandforlabor,whichhadaseriousimpactonthelocaleconomy.GrowersnotnamedbytheFDAasthesourceofcontaminationindicatedthatthenegativemarketimpactsoftheHepatitisAoutbreaklastedfromonetofourmonths(Calvin,AvendañoandSchwentesius,2004).Aswiththespinachcaseabove,allgrowerswereaffectedbythegenerallossofconsumerconfidence

ingreenonionsandlowerpriceswhetherthesegrowerswereGAPs-certifiedornot(i.e.,negativeexternalityeffect).However,interviewswithalimitednumberofMexicangreenoniongrowersinJune2004indicatedthatgrowerswiththird-partyGAPscertificationhadhighervolumesofsalesthanothergrowers(SeeTable1).Ifbuyersneededgreenonions,theysoughtgrowerswiththebestfood-safetyprograms although they did not pay more for the green onions. For these growers, green onion ship-mentsdidnotdecreasemarkedlynorweretheirothercropsaffected.GrowerswhowereintheprocessofbecomingGAPs-certifiedandhadauditstodemonstratetheirprogresstodateinimprovingfoodsafetyalsofaredreasonablywell.Theirshipmentsofgreenonionsusuallyfellabitanddemandforsomeoftheirothercropsdroppedslightly.ForproducerswhowerenotGAPs-certified,greenonionsalesdeclinedtoabouthalfthenormalvolumeanddemandforotherproductssoldbythesefirmsde-


PPT 8-14 (continued) clinedbyabout30percent.ForthosegrowerswhowerenotcompliantwithGAPsandwerenamedbyFDA as associated with the contaminated green onions, the impact was catastrophic. Shippers did not want green onions or any of their other products. These growers plowed up most of their green onions and sold small amounts to the domestic Mexican market.

Table 1. Impact of Hepatitus Outbreak on Mexican Growers, by GAPs Status

GAPS Status Impact on:Volume of green onion sales Demand for other products

GAPs Fairly constant No impact

Partial GAPs Down a bit Some impact

No GAPs Down by 50 percent Down by about 30 percent

No GAPs and named by FDA No sales and most fields plowed under

Shippers stopped selling all or almost all products from these growers

PPT 8-15: Having a Risk Management Model Is ImportantOnethingthattheprevioussectiononGAPs

tells us is that there are food safety risks in pro-duction and management, and treatment of these risks(throughGAPs,forexample)canhelpthegrowers’bottomlines.GAPsisjustoneapproachtomanagementoffood-safetyrisks.Growersshouldalsoconsiderimplementinga“riskman-agementmodel”toaddressthedifferentkindsofriskthattheycanface.Havingariskmanagementmodelwillallowoneto:(1)orderlymanagethedifferentkindsofrisks(whichcanreduceeconom-icloss),(2)getthehighestreturnonthemoneytobeinvestedinriskmanagement,and(3)iden-tify critical needs for management and employees to address these risks.

PPT 8-16: Steps in Risk ManagementTo have a good risk management model for the

farmbusiness,thefollowingstepsarenecessary:(1)riskidentification,(2)riskevaluation,(3)risktreatment,(4)selectionandimplementation,and(5)programmonitoring.


PPT 8-17: Insurance Is One Mechanism to Protect Against These RisksGrowersoffreshproducetodayfaceanumber

ofrisksassociatedwithoutbreaksoffood-borneillness.First,consumersaffectedbytheseout-breakscantakelegalactionagainstgrowersoftheaffected fresh produce to claim monetary damag-esduetoillness(alsocalledliabilityrisk).Second,regulators can issue a product recall or warning becauseoftheoutbreakandthiscancausehugeeconomic losses to growers due to a catastrophic drop in sales and/or damaged farm or product reputation. The risk of economic losses from law-suits,productrecallsandwarningsarebecoming

PPT 8-18: Insurance Coverage Options for Food Safety-Related RisksNo notes

PPT 8-17 (continued)increasinglyimportantthesedaysbecauseoutbreaksoffood-borneillnessareoccurringmorefrequently.Insuranceagainsttheriskofeconomiclossesfromtheseoutbreaksisoneimportantmechanismthat

growerscanutilizetosafeguardtheprofitabilityoftheirbusinessoperation.Withthevarietyofinsur-ancecoverageorpoliciesavailable,itisimportantforgrowersoffreshproducetounderstandwhatinsurancepoliciescoversothattheycanmakeinformeddecisionsabouttheinsurancetheyshouldpurchasefortheirfarmoperation.Notethattheinformationgivenhereonlyprovidesbasicinformationaboutthedifferentinsurancetypes.Formoredetailsaboutwhichinsurancemayapplytotheirparticu-lar operation, we advise growers to contact their insurance agents.


PPT 8-19: Insurance Coverage OptionsNo notes

PPT 8-20: Insurance Coverage OptionsNo notes

PPT 8-21: General Farm Liability Insurance Ageneralfarmliabilityinsurancepolicytypi-

callyprotectsagainstliabilityclaimsforbodilyinjuryandpropertydamagearisingoutofone’spremisesand/oroperations(IRMI,2008).Inotherwords, this type of insurance policy covers general costs and damages in case someone decides to suethefarmbusinessbecauseofsomethingthathappened on the premises. These types of farm liabilitypoliciescoverlawsuitsduetoon-farmac-cidents that affect farmers, employees, guests and customers.1Outlaw(2007)andtheNewEnglandSmallFarmInstitute(2008)suggestthatthesegeneralcommercialand/orfarmliabilitypolicieswouldbeappropriateforgrowerswithpick-your-

1NotehoweverthatthispolicydoesnotreplaceWorker’sCompensation insurance and only typically covers activities considered“farming.”


PPT 8-21 (continued)ownoperationsandon-farmstands.TheNewEnglandSmallFarmInstitute(2008)furtherexplainsthatfarmliabilityinsurancecoverslawsuitsfromactivitiesconsidered“farming,”whichisusuallydefinedtoincludeonlyagricultural-productionactivitiesandon-farmroadstands.Thesepoliciesalsotypicallycoverthesaleofproduceinitsraw,unprocessedstate,eitheron-farmsalesorsalesofthegrower’sproduceatthegrower’sstandatafarmersmarket.Thesaleofproducegrownbyanotherfarmer,eveniftheproduceissold“rawandunprocessed,”isnotcoveredunderageneralfarmliabilitypolicy.

PPT 8-22: Commercial Business Liability InsuranceCommercialbusinessliabilityinsurancemaybe

necessary if the grower also undertakes activities thatarenotconsidered“agricultural”or“farm-ing”(NewEnglandSmallFarmInstitute,2008).Itworksessentiallythesamewayasthegeneralfarmliabilityinsuranceaboveexceptthatitcovers“non-farm”or“non-agricultural”activities.Theinsurance is appropriate for growers who process fresh produce and have processing facilities. This insurance is also appropriate for growers who sell infarmers’marketsorsellmorethanacertainpercentageofproductsthatoriginateoff-farm(NewEnglandSmallFarmInstitute,2008).

PPT 8-23: Product Liability Insurance A lot of growers of fresh produce mistakenly

believethattheirgeneralfarmliabilitypolicypro-vides protection against claims of injury from con-taminatedfreshproducethatcauseanoutbreakofafood-borneillness.ButasHamilton(1999)explains,thisisnotgenerallythecasebecausetheinjurycanhappenoffthefarmpremises.Inthiscase,aproductliabilityinsurancepolicyisap-propriate since it protects against claims of injury causedbyadefectiveorhazardousproduct(e.g.,thecontaminatedfreshproduce).Thistypeofcoverage should provide some protection in the event that the fresh produce causes injury or

PPT 8-23 (continued)illnesstoaconsumer(Holland,2007).Anumberofretailstoresnowrequirethatfoodproductshaveaminimumlevelofproductliabilitycoveragebeforetheywillcarryit(normallya$1millionpolicyormore).Itisimportanttonote,however,thatfood-productliabilityinsurancestrictlycoversclaimsofinjured parties and not recall costs. Thecostoffood-productliabilitycoverageisnoteasytoestimate.Providersofthisinsurancepolicy

areoftenreluctanttoprovidequotessincethereisno“standard”premiumrateforfoodproductsandtheindustryisverycompetitive.Instead,mostinsurancecompaniesthatofferthiscoverageprovideanestimateonlywhenthegrowersubmitsaverydetaileddescriptionofhisorherproductandbusinessoperations(i.e.,production,distributionandmarketingplans).However,anapproximate“rule-of-


thumb”intheindustryisaround$1,000peryearfora$1millionpolicy.Basedonaninformalsurveyofinsuranceproviders(undertakeninMay1998),Holland(2007)indi-

catesthattheannualpremiumsforfood-productliabilityinsurancerangedfrom$500to$20,000fora$1millionpolicy.Theaveragefood-productliabilitypremiumwasfoundtobe$3,000fora$1millionpolicy.Themostsignificantfactorscontributingtotheamountofpremiumbeingchargedarethefol-lowing:levelofgrosssalesorannualpayroll,priorclaims(i.e.,claimshistory),levelofcoverage,typeofproduct, type of market and recall plan.

PPT 8-24: Product-Recall Insurance Aproduct-recallinsurancepolicytypicallyonly

covers the actual or direct costs of a product recall, such as costs associated with getting the contami-nated product off the shelf and destroyed, costs of replacing contaminated products and transporta-tioncosts.Itdoesnotcoverindirect costs or losses duetotheproductrecalloranoutbreakwarning,suchasthird-partyexpenses,lossofprofitandbusinessinterruptionlosses.Third-partyexpensesrefer to those costs that occur when a down-streamretailerofafoodproductlosesbusinessasa result of the contamination.2Lossofprofit

PPT 8-25: Accidental or Product Contami-nation Asmentionedabove,theproduct-recallinsur-

ance policy typically does not cover indirect ex-pensesduetoarecall(e.g.,third-partyexpenses,lossofprofitandbusinessinterruption).Amorecomprehensivepolicythatcoversboththedirectand indirect costs of product recall is the acciden-talorproductcontaminationpolicy.Italsocoversthe grower against claims resulting from its own

2Third-partyexpensesmayalsoincludetheliabilitythegrowerfacesfromdownstreamretailerswhosebrandnamesmaybetarnishedasaresultofthecontaminatedfreshpro-duce supplied to them.

PPT 8-24 (continued)referstosuchinstanceswheretheproductrecallorwarningdamagesconsumerconfidenceintheparticulargrowerofthefreshproduceinsuchawaythatrevenuesinthecurrentornextbusinesscyclearenegativelyaffected.Businessinterruptionlossesarethoselossesresultingfromaperiodwherethegrowers’operationsshutdown.Itisimportanttorememberthatproductrecallinsuranceonlycoversrecallcostsforgrowerswho

causedthecontaminationoroutbreak.Forthosegrowerswhowerenotasourceofcontaminationbutwhoseproductswerealsotakenofftheshelfasaprecaution,theirrecalllossesmaynotbecoveredbytheproduct-recallinsurancepolicy.Thisisespeciallyproblematicif,forexample,nogovernmententityofficiallytracedornarrowedthegeographicareaofthesourceofthecontamination(Odza,2008).


PPT 8-25 unintentionaldistributionofan“unsafe”product.However,aswiththeproduct-recallpolicyabove,this only applies to those growers whose product was contaminated. Those growers who suffered loss ofprofitorbusinessinterruptionlossesbutwerenotcontaminated(i.e.,theirproductwasjustrejectedasaprecautionorduetoamarketscare)typicallywillnotbecoveredunderthispolicy.

PPT 8-26: Malicious Tampering InsuranceInsuranceagainstmalicioustamperingisa

more comprehensive insurance policy that covers lossesfromcriminalactionsofsabotageagainstthe grower, as well as the losses covered in the accidentalorproductcontaminationpolicy(i.e.,theindirectanddirectrecallcosts).Anexampleof a private company that sells this type of com-prehensive coverage is MRM MacDougall Risk Management(Skeesetal.,2001).3Intheirinsur-ance product, damages due to malicious product tamperingareindemnifiedforupto$75millionwhile damages due to accidental product con-taminationareindemnifiedforupto$50million.

PPT 8-27: Combination Policies Note that some insurance companies offer

combinationorpackagepoliciesinwhichseveraldifferentinsurancepoliciesarecombined.Forexample,thegeneralfarmliabilitypolicyand/orcommercialbusinesscanbecombinedwithahomeowner’spolicy.Sometimesthiscombinationpolicy makes sense for a grower since some farms havebothresidentialandcommercialcharacter-istics.Itisespeciallyappropriateforfamilyandindividuallyoperatedfarms(ratherthanlargecorporatefarmingoperations).Anotherpotentialadvantageofcombinationpoliciesisthattypi-callyitisofferedatabetterpricethantwopoliciespurchased separately.

3ThispolicyisunderwrittenbyLloyd’sofLondon.

PPT 8-26 (continued)Undertheaccidentalcontaminationpartofthepolicy,lossesarecategorizedintofourareas:(1)recall

expenses,(2)lostgrossprofit,(3)rehabilitationexpensesand(4)crisisresponse.Thesecondcategorycoverslossfor“12monthsfollowingdiscovery”orlostprofitduringashorterperiodwhensalesrev-enueremainslessthanwhatcouldhavebeenreasonablyprojectedhadtheproductcontaminationnotoccurred.Indemnitiesareevenpaidtorebuildthelostmarketshare.Someexamplesofothercompa-niesofferingproduct-recallinsurance,accidentalcontaminationinsurance,malicioustamperinginsur-anceandcombinationsthereofareseeninTable1.Again,theshortcomingofthisproduct,aswiththeproduct recall and accidental contamination insurance policies, is that it only applies to growers whose product was contaminated.


PPT 8-28: Excess/Umbrella/Surplus Lines of InsuranceExcess/Umbrella/Surpluslinesofinsuranceare

thetermsusedtodescribevariousinsurancecoverage formats that provide protection from catastrophic loss when the underlying insurance isinadequateorlacking.Forexample,somerisksmaynotbecoveredbyNorthCarolinalicensedinsurance companies. The excess or surplus lines marketisaninsurancemarketplacethatisestab-lishedforthepurposeofinsuringuniqueorhard-to-placerisks.Forgrowersoffreshproduce,theseexcessorsurpluslinescanbepurchasedtoobtainadditionalprotectionaboveandbeyondtheperils

PPT 8-28 (continued)orlossescoveredunderthepoliciesabove.Hence,anexcessorsurplusinsurancepolicycanbetailoredtoprotectagainstlossesfromoutbreaksoffood-borneillnessevenwhenthegrower’sproductisnotcontaminated. The disadvantage of these types of policies is that they are not regulated under state laws(i.e.,premiumratesarenotregulated)andtheInsuranceGuarantyAssociationoffersnoguaranteeprotectionforcompaniesthatselltheselines.Therefore,ifthesurpluslinesinsurerhasfinancialdifficul-ties,claimsagainsttheexcessorsurpluspolicymightgounpaid.Notethatproduct-liabilityinsurancein North Carolina sometimes falls under excess or surplus lines of insurance.

PPT 8-29: Adjusted Gross Revenue (AGR) or Adjusted Gross Revenue-Lite (AGR-Lite)

All the insurance policy options discussed abovehavebeenprovided(andunderwritten)byprivateindustry,andthesepoliciesarenotapartofthegovernment-supportedFederalCropInsurance(FCI)program.4 Except for the excess/surplus lines, these privately provided insurance optionsonlycoverlossesrelatedtooutbreaksoffood-borneillnessifthegrower’sfreshproducewas contaminated. As already mentioned, the insuranceoptionsabove(exceptfortheexcess/surpluslines)donotapplytogrowerswhosepro-duce was not contaminated even if they suffered product-recallexpensessuchaslossofprofit,and/orlossduetobusinessinterruption(i.e.,theirproduct was rejected as a precaution or due to a marketscare).

4TheFCIprogramisoverseenbytheU.S.DepartmentofAgricultureRiskManagementAgency(USDA-RMA).Thisisapubliclysupported,privatelydeliveredprogramthatpro-vides different insurance products that help protect farmers from losses of yield or revenue due to natural perils such as drought,flood,etc.AGRandAGR-Liteareproductsofferedunderthisprogram.AGR-Liteistheproductcurrentlyavail-ableinNorthCarolina.


PPT 8-29 (continued)KeepinmindthattheAdjustedGrossRevenue(AGR)ortheAdjustedGrossRevenue-Lite(AGR-Lite)

insuranceproductsofferedundertheFCIprogramcanpotentiallycoversomeofthelostprofitsorrev-enuesduetoanoutbreakofafood-borneillnessevenifthegrower’sproductisnotcontaminated.ThisisbecauseAGRandAGR-Litearewhole-farmrevenueprotectioninsuranceplans.Thatis,theyprovideprotectionagainstlowfarmrevenuesduetounavoidablenaturaldisastersormarketfluctuationsthataffectincomeduringtheinsuranceyear.Theycoverfreshproduceaswellasmostfarm-raisedcropsandanimals(i.e.,anysourceofnon-value-addedagriculturalrevenueinthefarm).Thus,itcanpartlycoveracatastrophicdropinrevenuesfromfreshproduceduetoanoutbreakofafood-borneillness.Therevenuelosscaneitherbefromaprecipitouspricedroporasubstantiallylow(orzero)demandforthefreshproduceduetotheoutbreak.51

AGRandAGR-Liteuseagrower’sfive-yearhistoricalfarmaveragerevenueasreportedontheIRStaxreturnform(ScheduleForequivalentforms)andanannualfarmreportasabasetoprovidealevelofguaranteedrevenuefortheinsuranceperiod.Ifactualrevenuefortheperiodfallsundertherevenueguaranteechosenbythegrower,thentheAGRorAGR-Litepolicywillprovideindemnitypayments.Note,however,thattherearelimitstotheamountofrevenuethatcanbeinsureddependingonthecoverageandpaymentrateschosen.Hence,verylargecorporatefarmswithrevenuesabovetheselimitsmaynotqualify.FormoredetailsonAGRandAGR-Lite,pleaseseetheRiskManagementAgency(RMA)factsheetsaboutthem(RMA,2007).

5Notethatthisisourinterpretationofthepolicyasitiswritten.However,thereisaclauseintheAGR-Litepolicythatstatesthatlossesfromthefollowingmaynotbecovered:“inabilitytomarkettheagriculturalcommoditiesduetoquarantines,boy-cotts,orrefusalofanypersontoacceptyouragriculturalcommodities.”WehavecontactedRMAforclarificationofthisissueandtheyagreethataproductwarningthatcausesarevenuereduction(duetoanindustry-widedropinprices,forexample)wouldbecoveredunderAGR-Lite.Thewarningthatcausedlowpricesisa“marketfluctuation”andshouldbecoveredbytheAGR-Litepolicy.However,wewerenotabletogetadefinitiveinterpretationofwhetherrevenuelossesfromadirectgovern-ment announced product recall fall under this clause.

PPT 8-30: Case Study ActivityDistribute HO 8-1: “Managing Liability and Risk:

Case Study Activity” (see page 30)

ActivityQuestiontobedecided:Whatmarketbenefits

willJimandBettyHodgesgainfromchoosingtopursueGAPscertificationwhenitiscurrentlynotrequiredbytheirmarkets?


PPT 8-31: Tort Definition A Legal Primer: Liability Basics

Tort basicsA tort is a private or personal wrong for which

reliefmaybesoughtincourt.Reliefisusuallyintheformofmonetarydamagesbutneednotbesolelymonetary.Forsometorts,acourtmaybeaskedtoprovideinjunctiverelief.Injunctivereliefconsistsofacourtorderthatmaybeaffirmativeor negative in nature. The court may order the defendant either to do something or to refrain fromdoingsomething.Injunctivereliefisenforce-ablethroughcivilcontempt,whichgenerallyconsists of jailing the defendant until he or she complies. For producers of fresh produce, tort liabilitywillalmostalwaysbemonetaryinnature.Where regulatory agencies seek injunctive relief, it isusuallyundertheirregulatoryauthority(grant-edbyCongressorastatelegislature)ratherthanthrough tort law.

PPT 8-32: Types of TortsWhereatortisbaseduponastrictliability

theory,thereisliabilitywithoutfault.Toproveliabilityforastrictliabilitytort,theplaintiffneedonly prove that there was actual damage and that the defendant did the acts causing the dam-age.Thoseactsmustbewithintherathernar-rowrangeofactstowhichstrictliabilityapplies.Strictliabilityappliesonlytotwoareas.Thefirstis in cases in which the defendant was engaged inanultra-hazardousactivity.Suchactivitiesarerare and unlikely to apply to produce producers; however,strictliabilityisalsoappliedtoproductsunder the laws of some states. For example, the

PPT 8-32 (continued)courtsofsomestateswouldfindthataproducerwhosoldtomatoescontaminatedwithSalmonella hadproducedadefectiveproductandwasliablefordamages,evenwhentheproducerhadmadeeveryefforttoproduceasafeproduct.Notethatthewholesalerandretailerwillshareliabilitywiththeproducer.Intentionaltortsarethosethatresultfromanintentionalorrecklessactofthedefendant.Fewpro-

duceproducersarefacedwiththistypeoftort;however,suchatortcanbeverydevastatingbecausethe jury can award punitive damages in addition to actual damages. As an example, assume that a tomato producer knowingly uses a water source contaminated with raw sewage in his packing shed. Such a producer is acting with reckless disregard for the welfare of the consumers of his tomatoes and wouldlikelybeliableforbothpunitiveandactualdamages.Whereasactualdamagesarebaseduponthejury’sbestestimateoftheactualeconomicharm,thereislittlerelationshipbetweentheactualharm caused and the level of punitive damages. Juries may generally set punitive damages at whatever


PPT 8-32 (continued)leveltheybelieveissufficienttopunishproducersfortheirbadacts.Negligenttortsarefault-basedtorts.SomestatessuchasNorthCarolinapermitonlythenegligence

theoryincasesofproductsliability.NorthCarolina,however,wouldlikelyallowtheintentionaltort-basedactiondescribedintheparagraphabovedespitebarringtheuseofastrictliabilitystandardincasesofproductsliability.

PPT 8-33: Products Liability Productsliabilityisasubsetofthebroaderarea

oftortliability.Liabilityariseswhenaproductiseitherdefectivelydesignedorproduced.Liabilityapplies to every party in the chain of commerce from the point that the defect is introduced into theproduct.Theliabilityisjointandseveralwhichmeans that the plaintiff may recover damages from any one or all of the parties. Of course, the plaintiff cannot recover more than his total dam-ages. Among the defendants, one or more may havearighttocontributionfromoneormoreofthe other defendants. For example, if a producer signedanindemnificationagreementwiththebuyer,andthebuyerwasforcedtopaydam-ages to an injured consumer, the producer would becontractuallyliabletothebuyerforwhatthebuyerpaidtotheconsumer(plusattorneyfeesundermanyindemnitycontracts).

PPT 8-34: Products Liability (cont’d)Productsliabilityisanareaoftortlawthatim-

ports certain concepts from contract law. Among the most important of these concepts is the conceptofwarranty.Whilethebreachofawar-rantymaybethebasisforcontractualdamagesinalawsuitbaseduponthecontract,thewarrantymayalsohelptodefinewhethertheproductisdefective for purposes of tort law. An express war-ranty is one that is stated; for example, a varietal statementsuchas“ThisisaGermanJohnsontomato.”Animpliedwarrantyisoneimpliedbylaw.Forthepurposesofproductsliability,thereare two important implied warranties. The most importantismerchantability.Aproductthatismerchantableisonethatisofthetypeandqualitythat the trade expects. Produce that is contami-natedwithapathogenisnevermerchantable.Animpliedwarrantyoffitnessforaparticularpur-poseiscreatedwhenabuyertellsthesellerthathe has a particular purpose for the product. This warranty is generally not so important for cases of productsliability.


PPT 8-35: Strict Liability TortsAsnotedabove,manystatesapplystrictliability

intorttocasesofproductsliability.Iftheproductwasdefective,theproducerisliableforalldam-ages.Thelawtobeappliedwilloftenbethelawof the state in which the product is consumed, not the state of production. Even though North Carolinadoesnotapplystrictliabilityintort,many of the states where North Carolina produce isshippedandconsumeddoapplystrictliabilityin tort.

PPT 8-36: Intentional TortsHereisanexampletoillustrate.ProducerBob

drawswaterfromapondtouseinhisproduce-packing operation. The pond is fed from a stream thatrunsthroughhispasture.Bobmakesnoef-forttofilterorotherwisedisinfectthewaterpriortousingitinhispackingoperation.FamilyDoe’sdaughteratetomatoesfromProducerBob’sfarmand was sickened. She will never fully recover and the medical expenses that she is likely to expend overherlifetimeastheresultofeatingBob’sto-matoesareexpectedtobe$2.5million.ThejuryfoundthatProducerBobactedwithrecklessdisre-gardforthesafetyofothersbecauseheknewthathis practices were likely to cause serious injury to the consumers of his tomatoes. The jury awarded $2.5millioninactualdamagesand$10millioninpunitive damages.

PPT 8-37: Negligent TortsManycasesofproductsliabilitywillbebased

upon a negligence theory. All such cases, except forafewintentionaltortcases,willbebasedonnegligenceinNorthCarolinabecausestrictli-abilityintortisnotavailableinproducts-liabilitycases in North Carolina. There are four elements that a plaintiff must prove in a tort in negligence. Thefirstisduty.Produceproducershaveadutyto their customers to raise and pack produce that is not contaminated with pathogens or other dangerousmaterial.Ifaproducerfailstodothat,hehasbreachedhisduty.Theremustbeactualdamages.Andthebreachofdutymusthavebeenaforeseeablecauseoftheactualdamages.


PPT 8-38: Negligent Torts (cont’d)Therearedefensesavailableinnegligenceac-

tions.Themostimportantdefensesareavailablewheretheplaintiffcontributedtohisowninjuries,i.e.,waspartiallyatfault.InNorthCarolina,thedefenseiscalledcontributorynegligenceanditisanabsolutedefense.Mostotherstatesusesomevariantofcomparativenegligence.Incomparativenegligencestates,thecourtreducestheplaintiff’sawardbaseduponthedegreetowhichthejurydetermines that he was at fault. Some industries, suchastheequineindustry,havebeengivenre-ducedexposuretotortliabilitybystatute.

PPT 8-38 (continued)Liabilitywaiversareusedbysomeindustriessuchasthedownhill-skiingindustrytoshieldtheindus-

tryfromliabilityforcustomers’injuries.Somesellersofgoodsalsodisclaimallwarrantiesbymakingthesalean“asis”sale.Theterm“asis”asappliedtoasalemeansthattherearenowarranties.Whethersuchanapproachwouldworkintheproducebusinessisanopenquestion.Asapracticalmatter,useofliabilitywaiversanddisclaimerswouldprobablyfaceaninsurmountablemarketinghurdle—noonewouldbuyproduceundersuchconditions.

PPT 8-39: Statutory LiabilityRegulatory liabilityTortliabilityisnottheonlysourceofliabilityfor

the produce producer. Regulatory agencies may imposefinesandseektopreventmarketingofaproductbelievedtobeadulterated.Atleasttheo-retically,egregiousbehavior,usuallyresultingindeath,couldbecriminallyprosecuted.Somestat-utes may create a right in private parties to sue for damages. There is little or no state law that would giverisetoadministrativeliabilityinNorthCaro-lina. At the federal level, the Federal Food, Drug, andCosmeticsActobligesproduceandotherfood producers to avoid introducing

PPT 8-39 (continued)anyadulteratedfoodproductintothemarket.ThisisthebasicenforcementauthorityoftheFDAthatituses in cases of food products, including produce, that are contaminated with pathogens. Thereisaninteractionwithregulatoryliabilityandtortliability.Whereregulatoryactionistakenand

aviolationfound,thatviolationmaybeusedtoprovetheelementsofdutyandbreachofduty.Theexistenceofbothtortliabilityandregulatoryliabilityposesadilemmafortheproduceproducer.

Avoidingregulatoryliabilitymayrequirethatcertainrecordsbekept;however,thosesamerecordsmayrevealabreachofdutythatsupportsafindingoftortliability.Withlegalassistancetheproducercandeterminethoserecordsthatmustbekeptandensurethatinformationrecordeddoesnotsupportatortactionbaseduponnegligence.Onewaytodothisistoimplementasystemtofollow-uponallproblemsidentifiedanddocumentthepromptcorrectionofthoseproblems.ImplementationofvariouscertificationprogramssuchasGAPsmayalsorequirerecordkeeping.The


PPT 8-39 (continued)sameconsiderationsapply.Certificationprogramsmayprovideevidencethattheproducerfollowedpracticesthatmaketheproduceranunlikelysourceoftaintedproduce.Thustheuseofacertificationprogrammaybeused,inpart,toshowthatthestandardofcarehasbeenmet.However,theuseofacertificationinadvertisinghasotherimplications.Suchadvertisingmayhavetheeffectofraisingthestandardofcarebyincreasingtheexpectationsofconsumersthattheproductissafe.Whethertoad-vertiseacertificationornotisamarketingquestiontobeansweredbybalancingincreasedsalesfromadvertisingthecertificationagainsttheincreasedexposuretoliability.

PPT 8-40: Liability for Acts of an Indepen-dent Contractor

Liability for acts of independent contractorsIngeneral,onehasnoliabilityforactsofinde-

pendent contractors unless the activity for which the independent contractor was hired was inher-entlydangerous.Unlikestrictliability,theinde-pendentcontractormusthavebeennegligent(atfault)fortheonewhohiredhimtohavevicariousliability.Apersonwhohiresanindependentcon-tractormay,however,beliableforthetortofneg-ligent hiring if the person doing the hiring does notconductadequateduediligencetodeterminewhether the independent contractor is competent todothejobsafely.

PPT 8-41: Burden of ProofStandard of proof and other considerations in li-

ability lawsuitsUnlike a criminal prosecution where society is

concernedaboutputtingtheinnocentinprison,the standard of proof in a civil tort action is low. Theplaintiffneedonlyprovehiscasebyapre-ponderanceoftheevidence—thatis,morethan50percentoftheevidencefavorstheplaintiff.Tiesgotothedefendant.Incasesofproducecontaminated with a pathogen, it is often unclear where the contaminated produce originated and whointhesupplychainwasresponsibleforthecontamination. To win, the plaintiff need not provewithscientificcertaintythatthesuspectproduce caused the illness, was produced on the defendant’sfarmorthatthecontaminationwasintroducedbythedefendant.Itissufficientthatthe plaintiff introduce some evidence as to each of these points that the defendant cannot success-fully refute.Giventhebadpublicityassociatedwithatrial

(andresultantlossofmarkets),thelowstandardof proof that a civil plaintiff faces and the risk and


PPT 8-41 (continued)uncertaintyassociatedwithanyjurytrial,itisnosurprisethatmorethan95percentofalltortactionsaresettledbeforetrial.Awisedefendantoftensettlesevenwhencertainthatitwasnothisproducethat caused the harm. A jury may not see it that way.

ActivityDistribute“Post-testandModuleEvaluation”

PPT 8-42: ReferencesCalvin,L.2003.“Produce,FoodSafety,and

InternationalTrade:ResponsetoU.S.IllnessOutbreaksAssociatedwithImportedProduce.”InJ.Buzby(ed.),International Trade and Food Safety: Economic Theory and Case Studies.AER-828,USDA-EconomicResearchService,Washington,D.C.Calvin,L.2007.“OutbreakLinkedtoSpinach

ForcesReassessmentofFoodSafetyPractices.”Amber Waves. Vol.5,Issue3,p.24-31.USDA-Eco-nomic Research Service, Washington, D.C.

PPT 8-42 (continued)Calvin,L.,B.Avendaño,andR.Schwentesius.The Economics of Food Safety: The Case of Green Onions

and Hepatitis A Outbreaks.VGS-305-01,USDA-EconomicResearchService,Washington,D.C.Calvin,L.,R.Cook,M.Denbaly,C.Dimitri,L.Glaser,C.Handy,M.Jekanowski,P.Kaufman,B.Kris-

soff,G.Thompson,andS.Thornsbury.2001.U.S. Fresh Fruit and Vegetable Marketing: Emerging Trade Practices, Trends, and Issues. Ag.Econ.Report795,USDA-EconomicResearchService,Washington,D.C.Dato,V,A.Weltman,K.Waller,M.Ruta,A.Highbaugh-Battle,C.Hembree,S.Evenson,C.Wheeler,

andT.Vogt.2003.“HepatitisAOutbreakAssociatedwithGreenOnionsataRestaurant—Monaca,Pennsylvania,2003.”Morbidity and Mortality Weekly Report 52(47):1155-1157.CentersforDiseaseControlandPrevention.November28,2003.

The Packer.2002“Someoneshouldauditthird-partyauditors.”The Packer, Shawnee Mission, KS, (April8,2002):p.B1.U.S.FoodandDrugAdministration(FDA).2001.“AnalysisandEvaluationofPreventiveControlMea-

suresforControlandReduction/EliminationofMicrobialHazardsonFreshandFresh-CutProduce.”Center for Food Safety and Applied Nutrition, U.S. FDA, Washington DC.


PPT 8-43: ReferencesHamilton,N.1999.The Legal Guide for Di-

rect Farm Marketing. Drake University Press: Des Moines,IA.Holland,R.2007.“FoodProductLiabilityInsur-

ance.”CenterforProfitableAgricultureInfo.#11,University of Tennessee, Knowxville, TN. InternationalRiskManagementInstitute(IRMI).

2008.“GlossaryofTerms”inhttp://www.irmi.com(LastAccessed:June20,2008).Long,J.2008.Guide to Insurance for Your Busi-

ness.NorthCarolinaDepartmentofInsurance,Raleigh, NC.

PPT 8-43 (continued)NewEnglandSmallFarmInstitute.2008.“RiskyBusiness”Inhttp://www.smallfarm.org/nesfi_library/

virtual/virtual/riskybusiness(LastAccessed:June20,2008).NorthCarolinaDept.ofInsurance.2008.“AConsumer’sGuidetoSurplusLinesofInsurance.”NC

Dept.ofInsurance,Raleigh,NC.Odza,K.2008.“TomatoFallout–RecallInsuranceCoverageDisputes.”IntheFoodLiabilityLaw

Blog.http://www.foodliabilitylaw.com(LastAccessed:June20,2008).Outlaw,S.2007.“GettingtheRightLiabilityInsuranceCoverage.”Paperpresentationinthework-

shoptitled:ProfitableProduce:AWorkshoponLegalLiabilityandHandlingFoodSafety,Roxboro,NC(May,15,2007).RiskManagementAgency(RMA).2007.“2007AdjustedGrossRevenueLite”Factsheetthatcanbe

downloadedfromhttp://www.rma.usda.gov/pubs/rme/fctsht.html.Skees,J.R.,A.Botts,andK.A.Zeuli.2001.“ThePotentialforRecallInsurancetoImproveFoodSafe-

ty.”International Food and Agribusiness Review. 4(1):99-111.

PPT 8-44: ContactsRod M. Rejesus, Department of Agricultural and

ResourceEconomics,N.C.StateUniversity,(919)513-4605,[email protected].(Ted)Feitshans,J.D.,Department

of Agricultural and Resource Economics, N.C. StateUniversity,(919)[email protected]


For assistance in finding authorized insurance services in North Carolina: N.C. Depart-ment of Insurance

For assistance finding insurance, regularly licensed companies and surplus lines: MAP (919) 733-9811

For help with unauthorized insurance: 1-800-546-5664 (consumer services); (919) 733-7487 (agent services).


Handout 8-1 Module 8: Managing Liability and RiskCase Study Activity

Question to be decided: What market benefits will Jim and Betty Hodges gain from choosing to pursue GAPs certification when it is currently not required by their markets?

JimandBettyHodgesgrowfiveacresoftomatoes,twoacresofcucumbersandfiveacresofcan-taloupes.Becausethetomatoandcantaloupecropsaremorefrequentlyassociatedwithoutbreaksoffood-borneillness,thecoupleisweighingthecostsandbenefitsofseekingaGAPsaudittoobtainGAPscertification.Currentmarkets:TheHodgessellatthreedifferentfarmers’marketswithina50-mileradiusoftheir

farm.NoneofthemarketscurrentlyrequireGAPscertification;onemarketrequiresproducts-liabilityinsurance.Theypurchasedapolicygivingthem$1millioncoverage,atanannualcostof$800.Theyalready use drip irrigation from well water, so they will not need to make changes to their water system to beGAPs-compliant.BecomingGAPs-certifiedwillnotreplacetheneedforcoverageforproductsliability.

Initial Costs of Certification

Development of forms/paperwork procedures (does not include repeat copying expense) $500

Initial training time for four employees (est. @ 10 hours @ $9/hour) $360

Certification audit (first year may be offset by NCDA&CS grant, if available) $400

Estimated additional administrative time for owners (billed at $20/hour; 7 hrs/wk/24 weeks) $3,360

Purchase of used cooler that meets certification requirements $3,500

Misc. other costs $1,000

Total Initial Certification Cost Estimates $9,120

Current Annual Revenues

Market #1 $30,000

Market #2 $27,500

Market #3 $40,000

Total Annual Revenue $97,500

Currentcosts,includingwagesandsalariesfortheHodges,represent75percentoftheirrevenue,or$73,125.Theadditionofthefirstyear’scertificationcostswillreducenetprofitsbyanother$9,120,makingtotalannualcostsinYear1equalto84percentofrevenues.Recurringcostsinsubsequentyearswillcontinuetobeannualauditcosts,administrativecostsand

employee training.Non-financialbenefitstotheHodgesaretheimplementationofamorestructuredmanagement

systemthatwouldimproveworkerproductivity.AnotherbenefitistohaveGAPspracticesinplacesothatwhen(orif)GAPscertificationbecomesarequirementinoneormoremarkets,theyareaheadofthe game.AnothermarketopportunityisthattheGAPscertificationmaycreateanopportunitytopursueanad-

ditional marketing claim and charge a higher price for their produce, although this also creates another layerofliabilityforthemshouldsomeoneidentifytheirproduceasthesourceofafood-borneillness.We’lldiscussthispossibilityinthefinalsegmentofthepresentation.Inthemeantime,whatwould

yourecommendtheHodgesdo?

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