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Product Recall Preparedness

Food & Agribusiness, Property & Casualty

Balance sheet or Insurance – how are you funding your product recall?

If you sign up for automated food recall notifications through the Food and Drug Administration, you’ll likely receive nearly a dozen emails a week beginning with, [ABC Company] located in [Any Town, USA] is voluntarily recalling [x] product due to [fill in the blank with recall trigger].

Countless emails announcing food recalls can desensitize the casual reader to the true impact of a recall situation. But, for a food processor, a product recall is a stress-inducing, supply-chain-disrupting, and (potentially) financially devastating experience. Whether the recall is initiated due to a food-borne contamination or an undeclared allergen, a recall can have a tremendous impact on a company’s operations and reputation. Managing the risks associated with product recall begins with a company’s proactive commitment to total quality management. Pre-incident planning is critical; having in place a strong food safety plan which includes a product recall plan, is paramount.

If you manufacture in Wisconsin, all food facilities holding a food processor’s license are required to have a food recall plan. According to James Beix, Recall and Emergency Response Coordinator at the WI Department of Agriculture, Trade and Consumer Protection, the best recall plans are those that are specific, include roles/responsibilities by job position (not person), include suppliers/customers contact info, and are practiced and updated regularly as staff, suppliers and customers change. Specifics components of a food recall plan will be covered in a future article.

Product recall insurance coverages have been around since the 1980’s but policy coverages vary. When discussing product recall coverages, most food processors have the same three questions: do I have product recall coverage in my current policy, how much do I need, and how much does it cost?

Do I have product recall coverage in my current policy?

Most general liability policies provide bodily injury and property damage coverage for product liability caused by an occurrence. An occurrence is typically defined as an accident or repeated continuous exposure to the same general harmful conditions. For example, a company issues a voluntary product recall before a product is consumed. The company incurs expenses associated with the recall. In order to file a claim under the general liability coverage, the company must prove one of two things: a) someone was hurt or property was damaged b) whether an occurrence took place. In this case, a standard general liability policy won’t respond (pay) because the policy kicks in only if there is damage or an occurrence – as mentioned above.

The general liability coverage also fails to respond when the loss is strictly economic. (In Wisconsin, like most states the economic loss doctrine is alive and well.) In other words, if there is no bodily injury or property damage and your product is simply out of spec or mislabeled, the general liability policies are ineffective. In most circumstances, the general liability policy won’t cover costs associated with defending a breach of contract or product recall expenses incurred by you or your downstream customers. To cover this gap, food processors have the option of adding a rider to their general liability policy for limited product recall expense or they can purchase a customized product recall insurance policy. The advantage of a stand-alone product recall policy is that it could include coverage for a variety of expenses associated with the recall including: additional staff time spent to manage the recall, expenses associated with crisis management services and product disposal fees, amongst other expenses. If a company exports internationally, the processor can consider a global recall policy.

How much recall coverage do I need?

Ultimately, this business decision rests with the food processor because recall coverage is not one-size-fits-all. An experienced insurance broker familiar with food processing will walk the client through many product recall considerations including reviewing the company’s batch sizes, ingredient list, label requirements, shelf life, per unit processing costs, costs for items like transportation, storage, product disposal, labor and administration. This information will help determine the amount of coverage needed.

How much does recall coverage cost?

The cost for product recall coverage policies will depend upon your specific situation. For example, are you interested in having coverage for government initiated recalls in addition to voluntary recalls? Do you want recall coverage on some, but perhaps not all of your products? As a general rule, rating basis (or the basis upon which your premium is derived) are largely based upon annual sales. If you are the insurance buyer, you can make your premium money go much farther by becoming a better consumer. How so? By showing the underwriters that you are managing risks through rigorous preventative controls, written food safety and food recall plans and effective contractual liability control in your favor. Ultimately, the stronger the case you make for your operation– showing that you have stringent recall plans that have been tested– the greater leverage your broker will have in negotiating a competitive offer from the insurance company.

Now might be the time to dust off your recall plan and use it as a tool to improve your insurance coverage program. If you would like help reviewing your current plan and assessing your coverage needs, contact M3’s Food & Agribusiness professionals.

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This blog post is a summary of an article, Your Product Recall Plan: A Tool For Improving Your Insurance Coverage by Jen Pino-Gallagher, which the Cheese Reporter published on July 7, 2017.

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