Insureon Blog

Bakery Fraud Highlights the Limits of General Liability Insurance

21. March 2013 12:11

New Jersey-based Butterfly Bakery shut its doors last week after an FDA investigation found that it was selling mislabeled products. Specifically, according to the Huffington Post, the bakery was charged with selling improperly labeled food, including “sugar-free” items that contained sugar and products with more than three times the listed saturated fat content.

While the bakery noted that only three of its 45 products were found to have inaccurate labels, the violation was enough to trigger a shutdown. This incident raises important liability issues for owners of bakeries and other food services businesses. Here's a look at the most important of those issues.

General Liability Insurance Does Not Protect Against Fraud

If Butterfly Bakery was shut down because of something other than fraud, the company's General Liability Insurance would have protected it in several ways. For example…

In the case of fraud, however, liability insurance does not pay out. This is because a bakery that commits fraud has actually broken the law – and most insurance policies do not pay for damages caused by illegal activity.

Butterfly Bakery, then, will not be able to collect Business Interruption Insurance while its doors are shut, meaning that this violation could easily cause its ultimate failure.

Liability Stakes Are High in Food Labeling

In addition to forgoing any business interruption payments, committing fraud exposes a business to extensive liability expenses – and the stakes are particularly high in food industries. Consider, for example, a diabetic who ate one of the falsely labeled “sugar-free” confections. If the snack caused a negative health reaction that required medical attention, the customer could easily sue the bakery – and would likely win.

Because the bakery was responsible for mislabeling, however, there's a good chance that its liability insurance would not cover the associated costs. This means that the bakery would be responsible for paying all its own court costs as well as any settlement or judgment for which it was found liable.

If those expenses are not enough to put the bakery out of business, it could face serious fallout from the incident, losing the trust of its patrons and potentially lots of business from skeptical customers.

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Restaurants | Small Business Risk Management

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