All companies operating within the food and beverage industry, whether multinational in scale or independent local growers or food and beverage processors, are under constant risk of severe financial loss due to product contamination. This article provides some practical information about the risks, the heightened regulatory involvement, how traditional insurance may apply, a brief peek on what to expect in the event of a recall and options for effective protection through the utilization of Product Contamination & Recall insurance.
Two Key Areas of Focus
· How to transfer the financial risk of product contamination and product recall, and
· The critical necessity of integrating the insurance claim process within the recall event.
A One-Week Food Recall Snapshot
A snapshot of the U.S. Federal Food Safety website over a recent seven day span reveals food product recalls involving: Salmonella contaminated raw frozen fish, undeclared milk allergens in a Taco dinner product, Listeria contamination of pizza products, undeclared egg allergens in a sausage product, Listeria contamination of deli-sandwiches, mislabeling of a frozen pasta product, undeclared Sulfite allergens contained in a fruit preserve, undeclared peanut allergens in an almond snack, and of course, potential Salmonella contamination of fresh vegetable packaged salads. Most of these recalls affected independent private businesses and illustrate the vulnerability of all food and beverage businesses.
The Implications of the Food Safety Modernization Act (“FSMA”)
The potential effects of the FSMA with its passage into law on January 4, 2011, suggest that we can expect to realize more product recalls. Here are some key points to consider:
Enhanced Record Keeping & Full Access by FDA
Food producers are required to maintain detailed records of food safety and security protocols, including manufacturing, packaging, and distribution process of every food product for a minimum period of two years.
Registration, Inspection & Rejection of Imports
Food facilities must be registered,
Imports will be rejected when a foreign facility refuses inspection,
Increased inspections of U.S. and foreign food facilities
FDA Authorized to Mandate a Product Recall
The FDA’s authority to effectuate a unilateral product recall product was previously limited to baby formula and could only previously recommend a product recall. Under the FSMA the FDA can unilaterally order a product recall.
The FSMA provides protection to employees reporting regulatory violations.
The fact that the FDA can now unilaterally order product recalls and the codification of the protection afforded to employees reporting violations signals the need for heightened urgency on the part of the food and beverage industry enterprises to ensure that they are adequately protected against the devastating financial and reputational consequences caused by a product recall event.
How Can a Food or Beverage Enterprise Protect Itself?
Business Insurance 101
Every business owner has a varying degree of familiarity with a Business Owner’s Insurance Policy (“BOP”) which provides most smaller enterprises with two main forms of coverage: Commercial General Liability, Business Property, as well as a host of other ancillary coverage ranging from Business Automobile to Data Privacy Breach coverage. Some BOP policies also contain limited Employment Practices Liability and limited Employee Dishonesty coverage.
Unfortunately, many independent companies operating in this industry are operating under the misconception that their basic commercial insurance coverage will provide protection in the event of a product recall. Nothing could be further from the truth.
How Would a Commercial General Liability (CGL) Policy Respond?
For the limited purposes of this discussion, a CGL policy will provide defense and indemnification for claims of policy-defined “Bodily Injury or “Property Damage” brought by third-parties against the policyholder. Coverage under these policies is typically triggered by an “Occurrence” which is further defined as an “Accident.” CGL policies generally require that the “Bodily Injury” must have a physical manifestation to trigger coverage, rather than simply a claim of emotional distress. While specific policy language is always subject to the interpretation of a court, it is generally held that a physical bodily injury caused to a consumer arising from a contaminated product would be covered as a product liability claim under a CGL insurance policy.
While the associated bodily injury claims may be covered under a standard ISO CGL policy, those same policies also contain an exclusion typically entitled Recall of Products, Work or Impaired Property. That provision precludes coverage for any claims of damages associated with any loss, costs or expenses involving the policyholder’s product, work or impaired property if it involves a product recall or withdrawal because of a known or suspected defect.
The CGL – Product Recall Hybrid Policy
A recent entrant into the commercial insurance products arena provides limited coverage for some of the product recall expenses that would be otherwise uninsured under a standard CGL insurance policy. This type of combination policy provides coverage only for:
Customer notification costs of recalled product,
Recalled product shipping and disposal costs,
Refund, repair or replacement product costs
Reimbursement for third-party expenses including defense costs
It should be noted that the above expenses represent only a portion of the overall expenses that a company would incur in the event of a product recall.
The Commercial Property Policy
Commercial Property policies are available either with a more restrictive policy form only covering loss caused by policy-specified Perils (causes) or on an “All Risks” basis under which coverage is triggered from any cause or peril unless it is specifically excluded by the policy. Commercial Property policies provide coverage for, among other things, physical loss or damage to inventory and stock, which is pertinent to a discussion about product recall. Whether an affected product or stock has been actually physically injured by a covered peril is the initial determination that must be made in order to determine if the Commercial Property coverage will apply.
Additionally, Property policies contain a number of other provisions that may come into play to limit or exclude coverage in connection with a product recall event. One provision found in all Commercial Property policies is the Pollution Exclusion. This type of exclusion invariably contains the term “contaminant” which depending upon the particular Property policy and the legal jurisdiction that would interpret the Property policy’s coverage, may be held to apply to a contaminated product inventory or stock.
Product Contamination and Product Recall Insurance
The optimal way a food or beverage company can protect itself from the economic and reputational damages caused by a product recall is to transfer that risk through an insurance mechanism that is designed to specifically respond to a recall event.
Coverage under these policies are typically triggered by one or more of the following policy-defined events: Accidental Contamination, Malicious Contamination or Product Extortion.
First-Party Coverage responds to the policyholder’s:
• Business Income Loss,
• Recall Expenses,
• Product Rehabilitation expenses,
• Consultant and Advisor costs
• Extortion costs
Third-Party Coverage responds to the policyholder’s:
• Liability for claims brought by third-parties such as distributors, wholesalers, or supermarkets or other customers, for their economic loss and reputational damage in connection with a policyholder’s product recall.
This coverage is typically triggered when it is determined that consumption or use of the suspect product either has resulted in bodily injury or property damage or will result in bodily injury or property damage within 365 days of the product’s withdrawal.
Optional Coverage offered by at least one major Product Recall insurer includes:
• Product Refusal Coverage protects against economic loss caused by the refusal of an insured product during a scheduled delivery. The refusal must be caused due to a publication that the insured product will cause bodily injury and because bodily injury has been caused by a similar product.
• Intentionally Impaired Ingredients Coverage provides protection in the event of contamination or impairment of an insured product that results from an ingredient supplied to the policyholder and when the contamination or impairment was intentional and wrongful but not malicious.
Pre-Recall Consultative Services
Sophisticated Product Recall insurers will provide the policyholder with some limited of Pre-Recall Risk Management services as part of the protection afforded under the insurance policy.
These consultative services provided by external experts may include the analysis of one or more of a policyholder’s Crisis Management plan, its training & development processes, reviews of manufacturing and corporate systems and processes. There is little doubt that small to mid-sized companies without the benefit of dedicated risk management professionals can benefit from such analyses and advice. This process, which is voluntary, also benefits the insurance underwriters as it provides a deep view into the potential vulnerabilities of a policyholder to product contamination and recall, which if uncorrected to the satisfaction of the insurer, may result in less favorable terms and/or higher policy premium.
Complete Access & Cooperation
Unless a company has gone through the process of a product recall claim, most companies don’t realize their contractual obligations to fully cooperate with their Product Recall insurer. This means to immediately notify the insurer of a suspected event and to allow the insurer and their experts full access to records, product, company personnel an