Food is likely on the minds of many people as we head into the holiday season. Being an agricultural attorney, it’s hard to think about food without also worrying about food product liability. Whether growing turkey or romaine lettuce, producing food for human consumption is a risk-laden endeavor that can lead to legal liability for a farmer. That’s why knowing and following Good Agricultural Practices (GAPs) is imperative for farmers who raise produce, eggs, meats, and other foods for direct human consumption. Employing those production practices is critical to producing a safe food product. But what if a food isn’t safe and causes illness or death?
No one wants to believe their food product would harm someone or that their customers would sue them for such harm. But it’s a reality that food producers must face. I’ve recently had the pleasure of working with farmers in OSU’s Urban Master Farmers Program and OEFFA’s Begin Farming Program who are taking these risks to heart and learning not only about GAPs, but also about other tools that address food product liability risk. Teaching these producers has reminded me of how important it is to remind all producers about these tools. So here’s a rundown on four important food product liability tools:
- Management practices. In addition to using production practices such as GAPs, a producer’s management practices can also manage food liability risk. Thorough employee training, for instance, ensures that everyone is following GAPs and other risk management procedures. Documentation of production procedures can be useful evidence when determining liability for a food product. Keeping records of such documentation along with other records such as sales and training records can help inform what caused the incident and whether it can be traced to a producer’s product. Regulatory compliance, such as following Ohio’s Uniform Food Safety Code, might also be necessary, depending upon the food product. Each of these management practices feed into a solid risk management plan. This requires a producer to engage in continuing education.
- Insurance. An insurance policy can be an excellent way to manage food safety liability risk. But to obtain adequate insurance coverage, a producer should review all food products and food sales activities with an insurance professional. A farm’s standard liability policy might offer adequate coverage for the foods and food sales activities. Alternatively, a producer may need to add an endorsement or “rider” or obtain a separate commercial food product liability policy. The goal is to ensure coverage for medical and related costs if someone contracts a food borne illness from a particular food product sold in a particular way. It’s also important to revisit the insurance coverage when taking on a new activity or creating a new food product. Doing so will ensure maximum protection and reduce the possibility that an incident is not covered.
- Recall insurance and planning. A producer who sells a sizeable quantity of food products through a number of sources or a food broker may need to consider recall insurance. This type of policy will kick in when a food product must be recalled because it has been identified as a food safety risk. It can help cover the costs of notifying the public about the product and removing the product from stores, institutions and consumers. Likewise, having a detailed recall plan can minimize such costs by ensuring that the recall process is responsive, efficient and effective.
- Business entity formation. “Do I need an LLC?” is a common question we receive, and the answer is usually “it depends.” Organizing as a Limited Liability Company (LLC) or Corporation won’t prevent a producer’s liability, but it can limit the liability to the assets of the business. An LLC, for example, contains a producer’s business assets and separates them from the producer’s personal assets, such as a home. If there is a legal liability incident, the LLC assets would be subject to that liability. It would be difficult for someone to get beyond the LLC and into the producer's personal assets. The LLC doesn't relieve the producer from liability, but it can safeguard those personal assets.
Talking about legal liability has a way of ruining one’s appetite, but hopefully that won’t stop food producers from thinking seriously about food product liability risk. The good news is that like most liability exposure areas, tools can help minimize liability risks for our food producers. Using those tools might just help settle our worries about food product liability.
Written by Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
The Agricultural and Food Law Consortium is holding a webinar regarding Using LLCs in Agriculture: Beyond Liability Protection this Wednesday, August 16th at 12:00 (EST).
The Limited Liability Company (LLC) is a relatively new type of business entity. The first LLC statute passed in Wyoming in 1977. Since then, all fifty states passed legislation permitting LLCs as an operating entity. Many Ohio farmers use the LLC as their preferred operating entity.
In Ohio, an LLC is a legal entity created by Ohio statute. An LLC is considered to be separate and distinct from its owners. An LLC may have a single owner in Ohio, or it may have numerous owners. LLCs combine the best attributes of a corporation and a partnership. Individuals, corporations, other LLCs, trusts, and estates may be members in a single LLC. There is no limit on maximum members.
The Importance of an Operating Agreement
When an agricultural operation chooses to operate as an LLC, that operation must consider drafting an operating agreement. An operating agreement specifies the financial responsibilities of the parties, how profits and losses are shared among members within the LLC, limitations on transfers of membership, and other basic principles of operation.
If an LLC does not choose to draft an operating agreement, Ohio’s default rules apply. Ohio law prescribes default rules of operation for LLCs in R.C. Chapter 1705. However, LLC members often wish to modify state rules to tailor an LLC to their business. Ideally, agricultural operators should draft an operating agreement with the assistance of an attorney.
Single Member LLCs
Every state in the Midwest permits single-member Limited Liability Companies (SMLLCs). A single member LLC is an LLC which has one member or manager; that means that there are no other owners or managers of that LLC. In 2016, Ohio enacted R.C. 1705.031 which states that Ohio LLC laws apply to all LLCs, including those with only one member. Therefore, small agribusinesses that have only one member are not prevented from forming an LLC.
Will a Personal Guaranty on a Loan Affect Limited Liability Protection?
Ohio farmers operating as an LLC enjoy the benefits of limited liability protection. Usually, that means that the debts and obligations of a farm LLC operation are solely those of the LLC. That means that a farmer is not personally liable for any debts or obligations incurred by the LLC.
However, lenders, implement dealers, financial institutions, and others are finding ways around an LLC’s personal liability protection. Those parties are increasingly requiring that the members and managers of LLCs provide personal guarantees. That is, a member or manager of an LLC agrees to be personally liable for a debt or obligation, if an LLC is not able to pay.
A full discussion of personal guarantees and LLCs in an earlier blog post is here.
LLCs are not Invincible
Limited Liability Companies are extremely popular among Ohio farmers. However, LLCs merely limit liability. LLCs don’t create a perfect liability shield, they are subject to a concept known as “veil piercing” where the owners of a company are held personally liable for the actions of the company.
Generally, a person cannot use a corporation to commit fraud on others or to use a corporation as an alter ego for a member’s own personal gain. Plainly speaking, Ohio courts may hold an owner of an LLC liable in certain cases of fraud committed by the LLC or where an LLC is undercapitalized and is not treated as a separate entity from a member (i.e. the LLC is used as an “alter ego”). While this is not a common scenario among farm business LLCs, LLC members should be aware that a business’s status as an LLC will not shield it from liability in all instances.
Carrying Liability Insurance
Many LLC owners consider the protections under Ohio’s LLC laws to be sufficient. Some LLC members are satisfied that their personal assets are sufficiently protected and separated from LLC assets and LLC liabilities. However, every business should have liability insurance. Liability insurance is a relatively inexpensive means of managing liability exposure for injuries and physical damage to a third party. While insurance doesn’t lower liability, it gives the business a way to pay for damages in the event of an incident.
The question of “how much liability insurance should a farm operation have?” is a difficult one. The amount of insurance that a farm should have must be determined on a case-by-case basis. Factors such as farm size, type of operation, location, and other factors impact the insurance needs of a farm operation.
More information on LLCs and other alternative business organizations through the National Agricultural Law Center is here.