READY, SET………..RECALL!!!

Protecting the consumer is the number one priority in a product recall. The challenge is, can you do so without crippling your business? For large and small consumer goods manufacturers and distributors, recalls can cost millions of dollars in product losses and operational delays, not to mention the potential long term damage to a company’s reputation and customer confidence in the safety of their products. Although a company may have an understanding of the various aspects of a recall, such as how to notify government officials and regulators, and how to isolate the suspect product, they may not have a plan that incorporates the logistical requirements with reputation-saving efforts. Companies must be prepared to deal with a recall from several angles, including financial protection, logistical planning and effective communication with the public and media.

Financial protection through product recall or contamination insurance is only part of the solution. These insurance products should be supplemented by a crisis management component that assists companies both with logistics and communications considerations, as well as real-time crisis support to safeguard the insured’s reputation. An effective recall program that combines insurance protection with proactive recall, as well as crisis planning and support, is an up-front investment that can save a company.

Accidental contamination
The most common cause of product recalls in 2005 came from “mislabeling.” This type of “accidental contamination” may occur for several reasons including misprinting of ingredients or simply applying a similar, but incorrect label to the product. Although the product itself may not be contaminated, the product’s mislabeling could lead to bodily injury through allergic reaction precipitating a recall.

More commonly, accidental contamination is thought of as unintentional contamination by an external source or substance. This would include contamination by a foreign object (glass, metal, stones), chemicals (oil, cleaning solvents), as well as a biological contaminant (listeria, salmonella, Ecoli). These contaminations generally occur either through contaminated ingredients obtained from suppliers and having made their way through incoming quality control, or through faulty machinery or maintenance. A light bulb breaking over a batch; metal shavings from a conveyor belt or improperly sanitized equipment are a few real life examples of accidental contaminations.

Oversight of product recalls in the United States is overseen by several agencies. The U. S. Food and Drug Administration (FDA) is responsible for over 80 percent of food and beverage products with the remaining 20 percent administered by the U. S. Department of Agriculture (USDA). Non-food recalls are regulated primarily by the Consumer Product Safety Commission, but other governmental agencies regulating non-food recalls include the National Highway Traffic Safety Administration (automobile and related), the U.S. Coast Guard (watercraft), and the U. S. Environmental Protection Agency (pesticides).

Malicious product tampering
A less common, but potentially more destructive risk comes from deliberate or intentional contamination. The motives for product tampering vary widely making controlling or managing the exposure very difficult. Motivations can be financially driven as is the case in product extortion incidents and although uncommon in the U.S., countries such as Germany, Canada, the United Kingdom and Australia have a long history of these types of events.

The possibility of a biological, chemical, or radiological attack on the food supply continues to be a major concern for consumers, manufacturers and the government alike. The events of Sept. 11, 2001, reinforced the need to enhance the security of the United States. Political, terrorist or extremist groups may target companies due to a country affiliation or controversial product.

First party, third party and contractual exposures
Losses resulting from a product recall are generally classified as either first party losses or third party losses. First party losses are those losses that may be directly incurred or suffered by the insured. Third party losses are those losses that are suffered by customers of the insured and for which the insured may be legally obligated to reimburse the customer. Third party “recall” liability losses shouldn’t be confused with general or product liability.

The obvious and initial first party financial exposure lies in the logistics of the recall itself and the notification expenses incurred in properly and promptly notifying the public of a safety issue and recall. Communications, warehousing, testing, transportation, employee overtime and clean up are examples of extraordinary costs that may be incurred. The loss of profits and brand rehabilitation expense may continue on for months or even years.

The third party exposure to recall can be more difficult to quantify as these are largely outside the company’s own control. Third party losses typically would include losses suffered by your customers as a result of a recall cause by your product. Third party recall losses are not limited to recall expenses alone. They can include your customer’s loss of profits and extra expenses incurred not only to the affected product, but also to other products.

Companies that use subcontractors or co-packers face a unique exposure that can be difficult to control. In most cases, these company’s use stringent qualifying criteria prior to selecting a co-packer and require that co-packers abide by quality assurance standards at least equal to their own standards. However, should a co-packer precipitate a recall, they may not have the financial capabilities to respond to their customer’s losses. While requiring the co-packer to carry recall insurance may provide some level of protection, it is difficult to monitor and often the benefit accrues to the co-packer and not the customer. As it is the company’s brand and reputation at stake, these exposures are best addressed through their own insurance program.

Risk management and transfer options
No amount of insurance can replace customer confidence lost due to the ineffective execution of a company’s recall strategy. Once an incident becomes known to the media, a company can expect difficult questions from interested parties. First, customers will want to have an understanding of the potential danger and what the company is doing to minimize the dangers.

Every company should have a well documented and practiced crisis management plan. This plan coordinates all aspects of the crisis including procedures designed to quickly and efficiently identify, locate and recover any suspected products. It defines the crisis management team and their respective roles in responding to the crisis. All members need to be reachable at a moment’s notice.

Mistakenly, many companies believe they are protected for product recalls under their general or products liability policy. While these policies do provide coverage for liability from bodily injury, they do not provide coverage for product recalls. In fact, 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. …” Although some liability carriers may provide an extension for product recall losses, these are almost always subject to a minimal sublimit and are limited to first party recall expenses onl

Product recalls are and will continue to be a growing threat to both short and long term profitability to companies in a wide range of industries. Aligning the insured together with the proper coverage, preparedness and crisis support will be key in how well a company weathers the recall storm.

Bernie Steves joined Colemont Insurance Brokers as a senior vice president in the Chicago office in October 2005. Steves is recognized as one as a leading product recall, contamination, and food borne illness insurance specialists in the U.S.