Date: Nov 03, 2005
A full-scale recall involving food products can be catastrophic to a food manufacturer or retailer. Not only would a company have to pay for all the recalled products to be shipped to a suitable location and often destroyed, but associated costs such as advertising the recall, public relations to rehabilitate a damaged reputation, and additional expenses to win back customer support will all be extremely costly. Perhaps more troubling is that these numbers represent out of pocket expenses which must be spent only to deal with a recall; once you factor in lost profits that result from your product no longer being sold, the outcome could close a company's doors for good.
Very few (if any) recall costs are covered by a general liability policy. General liability policies are designed to cover and protect a company from product-related tort lawsuits, not mishaps causing economic injury to the manufacturer. To fully understand the economic consequences of a "recall," consider that food-related businesses generally operate with a 2-5% net profit margin. If your company has to order a recall that will cost hundreds of thousands or even millions of dollars, can you afford it? What about the cost to rehabilitate your name and win back the customers you have lost?
In order to insulate yourself from the economic and public relations damage that your company could face if a recall were to occur, it is highly advisable to consult with your broker and add food recall insurance to your existing coverage package.
Food recalls generally result from identifiable contamination incidents. Contamination incidents are either accidental or malicious, with the latter consisting of intentional product tampering. While contamination incidents have always been a concern for industry participants, the increased complexity and geographic reach of food distribution networks has dramatically increased the chances of accidental contamination. In addition, specific food contaminants such as Listeria, Dioxin, Lead, Salmonella, various under declared allergens, and now Avian Flu have been in the news almost non-stop. In order to get a true sense of the size and number of food (and drug) recalls in particular, one can visit FDA's website where there is an active list of current and on-going food and drug related recalls in the United States.1 All it takes is one positive test, one reported sickness, and your company could be facing a massive recall effort. In short, every company that deals with food or food products must be concerned with contamination in today's world.
Additionally, the public has become acutely aware of the possibility of malicious tampering since 9/11. Although authorities have taken necessary measures to increase security, the possibility of a terrorist related tampering cannot be ignored in today's environment. If this happens, the cost will be placed on the manufacturer, and the resulting publicity damage could be disastrous.
Regardless of how or why a food product must be recalled, the cost will always be high, and adequate protection should be sought.
Food recall insurance -- which is sometimes included under the broader heading of product recall, or recall insurance -- began in late 1980's as a result of the well known and publicized Tylenol tampering incident. In that case, a number of Tylenol bottles were intentionally laced with cyanide. As a result, seven people died, the company spent over $100 million dollars in remedial costs, and the Tylenol brand went from owning 35% of the non-prescription pain reliever market to around 8%. After this incident, a few insurers began offering recall insurance; however, at that time, coverage really only included malicious or intentional tampering. Nevertheless, and largely as a result of an increased number of recalls, accidental coverage began appearing in the early 1990s.
Recall insurance has proven to be very popular in Europe, and with the passage of E.U. Regulation 179 -- requiring that all food and beverage companies recall any product which violates the European Commission's food safety regulations -- it will continue to grow. This type of coverage is also becoming increasingly more visible in the United States through some recent and well publicized recalls. Although a number of insurers still do not offer this type of insurance, a handful of respected carriers do. Of course, as in any industry, companies that manufacture, sell, transport, or otherwise handle food, come in all shapes and sizes. Food recall insurance can and should be specifically tailored to meet the needs of a particular company. For example, a local bakery whose distribution network extends to only a few counties or states would not need the same amount of coverage as a massive manufacturer who distributes globally. In order to determine the right amount of coverage for your company, it is wise to consult a professional.
Generally, your recall insurance will cover most if not all of the costs associated with the recall. One prominent insurer provides a policy that covers both malicious and accidental contamination as well as product extortion. As always, however, the value of the policy is in the details. You want to make sure your company's policy covers shipping and destruction costs, media and public relations costs, and the amount you spend on replacing the recalled product in the market as well as restoring its name with the public. In short, these are the logistical and reparative measures that are always associated with a recall. Without adequate "recall" insurance protection, these expenses will not be covered.
Given the increasing number of recalls in today's food industry, can your company afford to be without food recall insurance?
© 2019 Keller and Heckman LLP. All rights reserved