Businesses at Risk:Do Your Clients Need CONTAMINATED PRODUCTS Insurance’

Ecoli bacteria in beverages, cyanide in capsules, salmonella contamination in meat, mislabeled products, threats to spread harmful rumors about a product-these and similar hazards create a crisis situation for a company and can result in serious consequences, forcing product recalls and causing potentially catastrophic losses.

“We’re seeing a definite rise in incidents of contamination and malicious threats, especially in Europe and the U.S.,” said AIG Europe’s head of Crisis Management, Diane Borden. “Food and agricultural products, juices and soft drinks, beer and wine, cosmetics and lotions, pharmaceutical products, tobacco, anything that can be ingested or applied poses a potential threat to health, and therefore to business.”

Contaminated products insurance (CPI) is available to cover these risks, but it’s frequently mistaken for a type of products liability coverage which the great majority of companies already have in one form or another. But products liability only covers claims made by third parties; it doesn’t cover the company’s direct losses. Until recently, few companies considered the risks to themselves, but in many cases the costs and related losses incurred by a product recall can cause them more serious damage than customer lawsuits.

What CPI covers

Although both products liability and CPI cover risks involving products, they differ greatly. “Recall and contaminated products insurance grew out of kidnap, ransom and extortion coverage,” said Tina Kirby of Lloyd’s Beazley Syndicate. “It started out as an adjunct to those policies, because like K&R coverage, it’s very important to use consulting services in handling the problems, not just covering the losses.”

The two remain separate and distinct, as they are designed to meet different threats. “Our [CPI] program is offered as a stand alone coverage,” Borden said, “but it can be readily combined with products liability coverage and other crisis containment products into a package of coverages designed to give the maximum protection to a business.”

AIG and Beazley, the leading underwriters for CPI, define the three general areas of coverage as accidental contamination, malicious tampering and product tamper extortion.

Benefits of coverage

CPI covers the direct and indirect costs of analyzing and, if necessary, recalling a contaminated product. The recall may be voluntary or mandatory, and can be caused by accidental contamination, malicious tampering, or mislabeling of its ingredients. Typically a policy covers the costs of inspecting the suspect product, withdrawing it from sale, destroying affected goods if necessary, and their replacement.

CPI also covers attempts to extort money with threats to contaminate a product, which may not involve a recall at all, but still must be dealt with. The policy therefore covers the costs of consultants to analyze and evaluate the threat, and, where required, any payments, recall costs and related expenses.

The potential damage to a business, however, involves more than direct costs. As part of their CPI coverage, both AIG and Beazley offer consulting services for crisis containment before and after an incident occurs. AIG makes the services of Kroll Associates, an internationally known security service provider, and the expertise of public relations firm Hill & Knowlton available on a 24-hour basis. Beazley’s “crisis link network” works with its clients’ own consultants and the firms of Sheldon Little and Shandwick.

Michael Schatzl, AIG’s San Francisco-based worldwide product line manager for CPI, stressed the importance of early crisis containment and the role of consultants. “If it’s caught at the right time, it’s controllable,” he said. “It’s extremely important in both accident and tampering incidents to analyze the situation, and that means getting as much information as soon as possible so the crisis can be handled as quickly as possible and the public retains confidence in the company.”

Getting the right spin

Good public relations counseling plays a crucial role in protecting a company’s brand name and reputation. “We maintain a 24-hour hotline to coordinate a response as soon as possible in order to mitigate the loss and control the damage,” Beazley’s Kirby said. “The consultants work for the insured, not the insurer, and they can turn a bad situation into a good one if they have the right message going out to the public.”

As examples, Kirby contrasted the incident of cyanide introduced into some capsules of Tylenol-which focused public attention on malicious tampering-with Perrier’s response when benzene was found in its bottled water. “[Johnson & Johnson] recalled every unit, and redesigned the package making them more tamper-proof. Their actions reassured the public and the brand emerged stronger,” Kirby said. “Then look at Perrier’s response; they didn’t do anything, and they disappeared from the shelves.”

CPI also covers the costs of “rehabilitation”-lost profits and related expenses. The goal of rehabilitation is to “restore the insured’s product to merchantable quality” and re-establish its level of sales and market share. Lost profits related to the incident are covered on a formula basis, and related expenses-which may be considerable if a production site has to be closed down and decontaminated-are reimbursed.

Who needs CPI coverage?

Multinational food processors, restaurant chains and pharmaceutical companies aren’t the only enterprises at risk from the effects of contaminated products. “It isn’t just Fortune 100 companies,” Schatzl said.”Everyone in the food chain is at risk, medium and smaller companies as well.” He indicated that the largest percentage of companies covered by AIG policies were those with turnover (gross sales) of between $100 and $700 million.

“Big companies, for instance Coca-Cola, usually have layered coverage,” Kirby said. “They’re self-insured or employ captives for the first $50 to $100 million, which is then reinsured. The next layer is excess coverage, say between $100 and $200 million, and so on. But smaller companies, which don’t have the resources to maintain in-house consultants, need their services when an incident occurs, and therefore obtain direct CPI coverage.”

The threats are real and growing. Yahoo’s “Food Safety” news site relates 10 incidents from June 16 to July 3. Kroll’s daily bulletin for June 26 lists three incidents in the U.S., one in Ireland and one in Canada. Between May 6 and June 26 the Food & Drug Administration (FDA) issued 10 alerts and recalls of potentially contaminated or mislabeled products.

Kroll’s June 27 Product Issues Bulletin lists incidents of the four most frequently occurring causes of contamination in food products for the first 24 weeks of the year. Taking the higher NETSS estimates, there were over 25,000 reported incidents in less than 6 months. Each one potentially threatens the producer of the product involved.

Premium costs and capacity

CPI is a specialized product, but the protection it offers isn’t beyond the means of most businesses. AIG has no minimum in the U.S. and a modest $5,000 in Europe. Premiums are calculated on several criteria. Beazley lists the following: revenue/ turnover, policy limit, business industry or type, product lines, brand profile, quality control procedures and crisis management planning.

AIG closely examines potential clients, compiling a list of “debits and credits” for each risk. “It’s a very difficult product to underwrite because you have to determine loss control estimates accurately, which means you have to examine quality
control procedures very carefully,” Schatzl said. “We need to know where they are in the food chain, do they have their own brand, who their suppliers are, what are their quality control procedures-do they adhere to HACCP [Hazard Analysis Critical Control Point] [FDA] standards-who’s responsible for loss control, and what kind of crisis
management plan do they have in place.” These and a number of other factors must
be considered to first determine insurability, and then to assess potential losses.

While the size of the company largely determines the policy limits-the bigger it is, the larger its potential losses from a recall-the capacity is substantial. AIG has in-house capacity of $10 million for accidental contamination, up to $70 million for malicious tampering and can cover higher amounts through reinsurance facilities. The policy limits don’t apply to the costs of the consultants.

The type of company also determines the coverage parameters. “The food industry is mainly concerned about the manufacturing [of products], the containers and the labels; restaurant chains about food-borne illness,” Schatzl said.

More frequent and detailed inspections indicate that more problems will be uncovered, hopefully before a contaminated product gets into public hands. By using experts and consultants to assess the threat at an early stage, it’s possible to minimize potentially devastating losses. This eventually reduces loss payments under a CPI policy and minimizes claims covered by products liability policies as well.

To comment on this article, send e-mail to ijwest@insurancejournal.com.