28 years in jail is a long time to think about what you could have done better in a product recall situation. Just ask Stuart Parnell, the former owner of Peanut Corporation of America.
His case, outlined alongside, exemplifies just how serious a product recall can be for all associated parties. But many businesses misunderstand their exposures and the practical challenges a product recall will create.
Recalls put companies in reverse
Businesses focus on selling products and/or services to customers. But a product recall event reverses that focus.
Instead of pushing product out, you’ve suddenly got to pull it back. There are very few businesses that understand the practical implications of a product recall event or that have the requisite skills to deal with them effectively.
This is shown in the difference between the perceived impact and the actual impact of a recall event. Many companies perceive business interruption as one of the smaller exposures associated with a product recall event.
But in reality, it’s their biggest exposure and this misunderstanding highlights the need for companies to explore their product recall arrangements and insurance coverage.
The reality of a recall event
Product recall insurance provides cover for accidental contamination – 95% of claims – malicious product tamper and extortion. The insurance responds to events where there’s the potential to create bodily injury.
But do you have the in-house capability to examine a contaminated product? Could you assess the threat it poses to people’s health, pinpoint the source, and effectively liaise with the appropriate government, regulatory and industry bodies?
How quickly could you create consistent, multi-channel communications? Could you manage negative publicity and enact an effective crisis management strategy?
All of this must be done within hours. There’s then the challenge of deciding what products to recall, identifying their location and deploying the necessary resources to make it happen.
And while this happens, how do you meet orders? Could you fulfil contracts? If not, how quickly will they be lost and when will you get the opportunity to win them back?
Product recall is not a matter of losing production for a day or two. It has the potential to kill your brand and your business.
Get it right and customers, suppliers and regulators will respect you as a professional business that takes its responsibilities seriously. Get it wrong and they see you as a company that can’t cope in a crisis, doesn’t value public health and puts profit above customer safety.
Responding to the risk
Product recall insurance provides cover for first and third-party recall expenses, business interruption losses and brand rehabilitation. It also provides pre- and post-loss access to expertise.
General liability policies won’t cover all these exposures and have insufficient limits.
Product recall insurers will make sure crisis management experts, PR specialists and food technicians are on-hand when needed. Some will provide funding for pre-loss activity such as reviewing existing recall plans, auditing suppliers and delivering in-house training.
A successfully managed recall event involves a lot more than simply getting your product off the shelves. Have you got the right partners in place to provide the right response?
Product recall takeaways
- Competition is pushing down premiums
- Accidental contamination accounts for 95% of claims
- Regulation is tighter, contamination detection is better and social media means people find out faster. These factors are driving the frequency and severity of a product recall.
Product recall case study – it really is a matter of life and death
- In January 2009, Peanut Corporation of America (PCA) issued one of the largest ever food recalls for products that might contain salmonella
- There was evidence that officials knew products were contaminated
- Nine people died and there were more than 700 reported illnesses across 46 states
- In total, the recall involved almost 4,000 products, from more than 360 companies, that contained PCA’s tainted peanut products/ingredients
- Criminal charges were brought and PCA’s owner was sentenced to 28 years in prison.
Thank you to Ian Bailey from Hiscox, for his contributions to this article.
For further information please contact Kiran Nayee, Senior Partner on +44 (0)20 7558 3029 or email Kiran_nayee@jltgroup.com.
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