PRODUCT RECALL/ CONTAMINATION

INSURANCE

Did you know………………?

EACH YEAR IN THE U.S. ……………………………….

48,000,000 PEOPLE SICKENED (1 in 6 citizens)

128,000 HOSPITALIZATIONS

3,000 + DEATHS

EACH WEEK IN THE U.S. ……………………………….

25+ RECALLS OF FOOD (average)

Source: Centers for Disease Control and Prevention 2011

HISTORY…Legal action and need for insurance

-1906-……year author Upton Sinclair wrote the novel“The Jungle” in which he detailed the corruption and unsanitary conditions in the meat packing industry.

Upton Sinclair

Sinclair’s novel lead to a50% reduction in purchasesof American beef.

-1930-Increased civil scrutiny and public awareness led to….1930 Food & Drug Administration founded.

Regulates and enforces food safetystatute along with Department of Agriculture.

Food Standards Committee 1930

1982 – Turning Point

Johnson & Johnson spent $100,000,000 on recall of Tylenol after seven deaths following a malicious contamination of it popular drug with cyanide.

.

1982 – Turning Point (cont)

The “Tylenol Murders” resulted in increased public and government awareness of contamination issues.

Led to increase in purchases of recall/contamination insurance. Policies coverages are expanded ….. adding Accidental Contamination coverage.

Until 1982, few contamination incidents, few recalls. Publicity of Tylenol incident caused increase in numbers of reported contamination incidents, malicious and accidental.

Product Recall/ Contamination Insurance In a nutshell

What is a Recall? A recall is the action taken by a firm to removeor withdraw a product from the market because ithas caused, or has the likely potential to cause, bodily injury or property damage as a result of normal use or exposure.

Major Contamination Causes

Biologicalpathogens (such as salmonella, E-coli,

botulisms) bacteria and miscellaneous micro-organisms

organic matter (such as insects, rodents, rodent excrement)

Physicaldirt, packaging material, jewelry, metal

shavings,miscellaneous debris

Chemicalpesticides, cleaning solutions, lubrication

residue,miscellaneous chemicals

Major Contamination Causes (cont)

Cross-contamination Example - raw meat juices mix with raw

vegetable matter during processing

Mis-labeling(including allergens and consumptions

dates):gluten, eggs, soya, shell fish, nuts, fruits,

milk andwhey products, dyes, many others

Food Borne Pathogens

CDC Estimates of Food Borne Illnesses in U.S. - 2011

Product Recall/Contamination Coverages

Accidental Product ContaminationMalicious Product ContaminationProduct Extortion

**** Under most recall/contamination policies a contamination event must occur to trigger coverage. The event must take place within the policyholder’s scope of business. In most cases, events involvinga competitor’s business or other similar businesswill not trigger a PR/PC policy.

**** Some policies will trigger on a speculation of a contamination.

Mistakenly, many company executives believetheir companies are properly insured for recall costs under their General Liability/Products policies.

General liability and product liability policiesdo not cover the expenses of recalling a productfrom the marketplace. Endorsements to GL policies sometimes provide a very low limit (usually $100,000) and restrict coverage to first party recall expenses only.  

Standard ISO forms specifically exclude “damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of your product, your work or impaired property ………….”

Covered Costs

Pre-Recall Expense• Laboratory and forensic inspections,

chemical analysis, testing• Costs and fees of experts and

advisors

Covered Costs (cont.)

Recall Costs• Third party recall costs of customers

recalling the insured’s product• Additional warehouse expenses• Costs of examining, disposing of, or

destroying the insured product• Value of any recalled or destroyed

insured product• Costs of re-distributing the insured

product• Communications and media

announcements• Transportation costs• Employee overtime costs

Covered Costs (cont.)

Recall Costs (cont.)

• Expenses of additional staffing• Employees’ out of pocket expenses • Costs of cancellation of advertising and promotion, shelf slotting• Other necessary retained consultants • Increased cost of working: – Cleaning machinery, vehicles,

contamination site – Maintaining minimum workforce – Increased cost of sub-contracting to

others• Rehabilitation costs (usually a sub-limit• Loss of Gross Income (usually a sub-

limit)

Note: Covered costs, sub-limit percentages and other provisions vary among insurance companies that offer this coverage. All insurance buyers should be advised to compare coverage provisions carefully before making a purchasing decision.

Third Party Coverage

Losses suffered by insured’s customers that areforced to recall insured’s products

Especially vulnerable if product is usually an ingredient (nuts, spices, grains, fruits, flavorings, hundreds of others)

Costs of recall can multiply significantly

(An optional coverage in some policies)

Crisis ManagementServices A crucial component ofPR/PC Insurance.

Elements ofCrisis Management Services1. Notify and coordinate forensic and testing specialists 2. Investigation – confirm recall is needed3. Crisis team assembly4. Arrange for additional consulting specialists 5. Assist in and guide media announcements and communications 6. Regulatory liaison7 Post incident assistance

These services are usually included in the premium. Other services, such as procedural reviews, crisis simulation,recall and HAACP plan review, mock recall, microbiological risk assessment and training can usually be purchased as fee for service.

Targeted Industries

Virtually all entities involved in the food and beverage business, from the farm and pasture to the consumer’s plate, should consider the purchase of RECALL/CONTAMINATION insurance……

Farmers/GrowersProcessorsManufacturersLivestock operationsMeat packersDistributorsPackagers

LabelersImportersBottlersWineriesHarvestersCo-ops

Products/IngredientsRecalled RecentlyPre-prepared burritosSmoked salmonPeppersAvocadosBeef cheek productsPorkGarlic breadFrozen novelty popsGround beefClam ChowderKernel cornPeanutsSalted CroakerPistachiosRaw chickenLettuceSpinachCantaloupe

(above is very small percentage of recently recalled food/beverage products)

CheeseBottled waterCookiesInstant coffeePrepared pestoFrozen musselsTaco dinner kitsRaw tunaSnack nit blendsPastaPrepared piesEggplant and garlic spreadFrozen entreesBird foodDog foodFrozen piesNoodlesSprouts

Products/IngredientsRecalled Recently (cont.)

Sausage productsSalad dressingChicken saladCrackersFruit cakeBreadTurkey BurgersPre-prepared sandwichesCanned seafoodRazor clamsRaw food barsIce creamBaking mixSoup mix

Alfalfa productsCucumbersDiet barsFlavoringsPound cakeHerring in oilGround turmericTaco sauceShrimpChocolate energy drinkPre-prepared sushi CilantroTomatoes

Recall Costs (cont.)

Among the members of the Grocery Manufacturers Association who participated in a recent survey,58% reported they had been affected by a productrecall in the last five years.

For the participating companies that have faced a recall in the past five years, 77% reported that the cost was under $9,000,000. The remaining 23% reported higher costs. About 81% described the potential risk from recalls as being “significant” to “catastrophic.” (source – Grocery manufacturer’s Association “Capturing Recall Costs” 2012)

Recall Costs

In 2007, the estimated cost of the peanut butter recall to one company due to Salmonella contamination was $78,000,000. The estimated total cost to peanut butter product producers was $1,000,000,000.

Experts agree that arriving at an “average cost” of a recall is difficult owing to many variables …. type of product, distribution area, company size, etc.

(source – Grocery manufacturer’s Association “Capturing Recall Costs” 2012)

Recall Costs (cont.)

Moreover, there is no one industry bureau or government authority that collects and analyzes specific recall experience data to determine recall costs broken down by wide industry segments and company size … thus no broadly proven data are available. 

However, all the experts agree that the cost of an uninsured recall could easily cause the bankruptcy of the company involved

(source – Grocery manufacturer’s Association “Capturing Recall Costs” 2012)

Food Safety Modernization ActBecame law on January 1, 2011First major amendment to Food Safety laws in 75 years

Among the provisions:

1. FDA will inspect high risk food facilities in next 5 years. Every 3 years thereafter

2. FDA has authority to detain food products it deems possible to be contaminated

3. FDA can suspend operations if there is probability that food from a facility may prove harmful

4. FDA can force a recall

5. FDA can request safety certifications from food importers

Food Safety Modernization Act (cont.)

6. FDA can request registration of food businesses

7. Unannounced inspections by FDA now authorized

8. Food companies require to keep detailed records

9. Whistleblower protection for employees

Expected impact: Difficult to assess.However, government mandated recalls, more frequent recalls, higher operating costs are very possible.

The wise man knows ……

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’lldo things differently.”

Warren Buffet

Product Recall/Contamination Insurance:Protecting your and your client’s reputation