The Sad Case of the Mad Cow

The discovery in December 2003 of the first known case of bovine spongiform encephalopathy (BSE)—commonly known as mad cow disease—in the United States was a downer, both literally and figuratively.

A United States Department of Agriculture veterinarian maintains the animal—discovered in a herd of 4,000 cattle in the state of Washington—was what is known in the cattle industry as a “downer,” a cow that for one reason or another cannot stand or walk on its own. The USDA’s BSE surveillance program has in the past been conducted on the premise that downers and sick animals are more likely than healthier cows to test positive for the disease.

The discovery of the diseased animal is also a figurative downer because for the first time, the U.S. cattle industry is being forced to contend with a disease that devastated Canada’s cattle industry last summer and has plagued the United Kingdom for decades.

This occurrence of a known case of mad cow disease in the United States has certain insurance ramifications and presents complex tort issues, as well, according to the Insurance Information Institute (I.I.I.).

I.I.I. believes the economic consequences associated with BSE could add up to billions, as countries ban imported U.S. beef and U.S. consumers shun it. However, a recent USDA report noted that so far strong beef demand and poor feedlot performance are helping offset the negative impact of recent export bans on U.S. beef and cattle. According to the USDA, beef production is lagging earlier expectations due to a slower-than-expected slaughter pace and severe winter weather that kept weights under those of last year. An undiminished demand for beef, coupled with lower beef supplies, is helping to support prices.

As I.I.I. pointed out in a bulletin discussing mad cow disease, the economic costs of the disease differ from insurance costs. While the disease may impact various lines of insurance, tort exposures ultimately may have the most effect on the industry.

Out of luck?
In many cases, livestock producers who had not previously acted to secure coverage for their herds may be out of luck.

Animal mortality insurance obtained through a private carrier could come into play as it covers the market value of cattle in government-enforced slaughter. However, I.I.I. pointed out that mortality is generally only taken out on high value livestock, such as a prize stud bull, rather than a whole herd.

The government-sponsored LRP or Livestock Risk Protection insurance program was expanded in 2003 to encompass feeder and fed cattle and was available in a limited number of states— Colorado, Iowa, Kansas, Nebraska, Nevada, Oklahoma, South Dakota, Texas, Utah and Wyoming. The program came to a screeching halt in December when the diseased animal was detected. The USDA’s Risk Management Agency (RMA), which announced the suspension of the program, said at the time it expected that the discovery of the disease “would have a significant effect on the price of cattle for the foreseeable future.”

According to Associated Press reports, 648 policies were sold within two and a half hours of the government’s announcement that an infected cow had been detected. Until that point only 646 policies had been issued. In halting the sale of new policies the RMA said the program, which was designed as a price protection plan, couldn’t remain actuarially sound if the demand for the product became too high. Cattle producers who had already purchased the protection would continue to be insured, but the policies were only written for a limited time span, the longest being one year.

Lawsuits always a possibility
According to III, litigation is almost a certainty if BSE tainted meat works its way into the food supply. The latency period for developing the human version of BSE, variant Creutzfeldt-Jakob Disease (vCJD), is long—and rare—and therefore not an immediate issue, at least in terms of personal injury cases. But I.I.I. pointed out that claims of emotional distress could be triggered if it can be proven that tainted meat was consumed.

A more likely avenue for a tort case is negligence, I.I.I. said in its bulletin: “An argument could be made, if the tainted meat reaches the food supply, that the farmer, meat packer, processors, feedstock supplier, retailer/restaurant etc., were all negligent and caused (or suffered) economic damage. In that case, there would be suits filed by these parties against each other and against outside parties.”

Also, products liability litigation would most likely be aimed at the feedstock supplier, as cattle are most often infected by consuming feed containing tainted ingredients from the ground-up organs of other cattle.

Ahead of the curve
Cattle producers are not completely without recourse if they are interested in purchasing insurance to cover some of the risks associated with diseased herds.

One company that got a jump on BSE coverage before the diseased animal was discovered in Washington is General Fire & Casualty Co. (www.genfireins.com), based in Boise, Idaho. In October 2003 General Fire rolled out CattleGuard, a new product specifically aimed at disease related-losses in the cattle industry. The policy covers losses related to FMD (foot-and-mouth disease), BSE, hydrophobia (rabies), anthrax (charbon or splenic fever) and other specified diseases, even if such a disease outbreak is a result of an act of terrorism.

The policy is a stand-alone property product that provides for loss to livestock, specifically beef cattle, beef production and dairy and is marketed through independent agents. General Fire believes its product is unique in many respects.

“One thing about this policy—it’s not a revenue protection,” Dr. Sam Fassig, director of veterinary business resources for General Fire & Casualty, said. “This is designed to keep them [cattle producers] in business.”

Fassig said the “specified disease must occur at the policyholder’s premise, it must trigger a quarantine, and the governmental order to depopulate needs to be generated and that will trigger the policy.” He added that CattleGuard provides for such things as medical expenses, the cost of burning the carcasses, providing paychecks to production employees and paying the mortgage on the operation up to the limits of the policy.

The company has combined in the basic CattleGuard product some named perils along with the disease portion of the policy. Also available are other named perils that may have previously been procured through other sources, such as cold weather events, feed and water contamination, theft, etc. The added optional perils will affect the price and are only available with purchase of the disease coverage.

“We have some other diseases that are very similar to mad cow in this country—scrapie in sheep, wasting disease in deer populations—our concern is that they’re kind of the same family,” Fassig said. “The concern, of course, is that we don’t see some transfers to the cattle.”

The CattleGuard policy contains a significant education component. Not only do agents have to be trained regarding the product before they can sell it, but the company focuses on educating cattle producers too. It offers assistance to producers with biosecurity and biocontainment plans, as well loss prevention for their operations.

“These policies are really starting to generate an increase in awareness in what we call the ‘standard of care’ as far as veterinary medicine … and reemphasizing the importance of biosecurity programs in the marketplace,” Fassig said. “Eventually everyone along the production chain is going to require that whoever they buy cattle from or get resources from … be part of that type of production program.”

He added that those who don’t meet those standards won’t be sought out as providers. “Indirectly, that raises the standard of care and standard of awareness for all these operations, which only helps the industry in general.”

General Fire & Casualty has placed limits on the number of policies it is willing to take on due to the amount of capital it is able to bring to the marketplace for the CattleGuard product. It has a limited capacity of $5 million per location, which is a risk zone of 25 miles. However, once the policy has grown on its own merits, the company believes it can go back to its reinsurers for increased capital.

Expanded surveillance
For its part, the government has committed to an expanded surveillance effort for BSE. As announced on March 15 by Agriculture Secretary Ann Veneman, the one-year enhanced surveillance program will continue to target cattle from the populations considered at highest risk for the disease, as well as a random sampling of animals from the aged cattle population. The number of target animals to be surveyed and will greatly increase.

“We are committed to ensuring that a robust U.S. surveillance program continues in this country,” Veneman said when announcing the expansion. “This one-time extensive surveillance plan reflects the recommendation of the international scientific review panel.”

Veneman said that plans are for $70 million to be transferred from the USDA Commodity Credit Corp. to fund the enhanced program.