Liability Insurers As Regulatory Intermediaries in the Food Safety System

Friday, 3 July 2015: 8:30 AM-10:00 AM
TW2.3.04 (Tower Two)
Timothy Lytton, Albany Law School, Albany, NY

Food safety regulation is a complex system made up of three interacting components: government regulation, civil liability, and industry supply chain management. Each of these components is itself made up of many parts, and the various constituents of the system interact with each other through a multiplicity of overlapping legal, economic, and social networks. The framework of rule-makers, rule-takers, and rule-intermediaries offers a helpful way to analyze the structure and dynamics of key relationships between actors within the system. This paper develops an account of liability insurers as rule intermediaries within the U.S. food safety system.

Food safety rules—government regulations, liability standards, and product specifications—depend upon reliable cost-benefit information to determine the optimal level of risk reduction. Unfortunately, the rule-makers within the system are not well equipped to accurately calculate the costs and benefits of particular food safety measures. Companies are likely to underinvest in safety when setting and enforcing product specifications since they do not pay the full costs of foodborne illness, which is rarely traced back to a particular product. Although government regulators are required to establish that the benefits of any new regulation outweigh its costs, such estimates are highly speculative since, in most cases, it is impossible to isolate the beneficial effects of particular risk reduction measures, and reliable baseline information is lacking. Government regulators often look to industry for information about the potential costs of food safety measures, but companies frequently consider production cost information proprietary, and they have an incentive to exaggerate the costs in order to dissuade regulators from imposing new regulations. Courts, through civil discovery, can compel the production of industry information, but only from parties that happen to be in litigation. Moreover, most litigation ends in settlements that produce no publicly available cost-benefit information.

Liability insurance is a promising source of more accurate cost-benefit information. Liability underwriters have incentive to reduce the risk of foodborne illness to lower their exposure. They do this by excluding coverage for failure to take specific safety precautions or by setting rates based on a company’s history of past claims. In a competitive insurance market, insurers will impose only cost-effective demands on companies since, if they exclude coverage for risks that are more efficient to insure than to eliminate or they set rates too high, their competitors will offer more extensive or cheaper coverage. Liability insurers thus have a powerful incentive to obtain accurate cost-benefit information, and they have access to information not available to government regulators because companies must provide insurers information regarding their production processes to obtain coverage.

 Liability insurers serve as regulatory intermediaries in a number of ways. They provide a source of accurate cost-benefit information that improves the efforts of government regulators to develop optimal risk regulations for industry. Liability insurers translate potential civil liability into more immediate incentives for companies to take concrete and specific risk-reduction measures to optimize risk. And liability insurers push firms throughout the supply chain to carefully assess the costs of specific food safety risks and to set optimal standards for risk reduction in product specifications. The paper analyzes these ways in which liability insurers’ intermediary roles affect the content of standards and the effectiveness of safety incentives within the food safety system. The paper concludes by discussing how and why liability insurance markets in the food safety system currently fall short of the ideal of optimal risk reduction, and it proposes several specific reforms. It also considers the relevance of this analysis to transnational regulation within the global food safety system.