The recent Mars issue has once again thrown a spotlight onto the need for product integrity in the food and drink sector, leaving many manufacturers, suppliers and retailers concerned about the potential implications of a product recall on their own business.
The story broke on the 23 February after a customer in Germany found bits of plastic in a Snickers bar in January. The plastic was consequently traced back to the Mars factory in the southern town of Veghel in the Netherlands. As a result Mars have ordered a recall of chocolate products in 55 countries, with a Mars Netherlands spokesperson commenting: “We cannot be sure that this plastic was only in that particular Snickers. We do not want any products on the market that may not meet our quality requirements, so we decided to take them all back."
This is not the first recall issue to hit the headlines, we only need to go back to the horsemeat scandal of 2013 and it certainly will not be the last. Companies need to have robust systems, protocols and procedures in place to ensure they can cope in the event of a supply chain issue. These should include having a list of key personnel, understanding what defines whether something should be withdrawn or recalled, and knowing who has that authority.
This information should all be available as an emergency pack and it should be reviewed and tested at least annually.
As the industry deals with these questions, they will have to decide if insurance is the most appropriate and effective way of protecting their business. Companies will have to consider the scope of the cover, the additional benefits it offers and the cost.
At a practical level, insurance provides food companies with cover against costs arising from accidental or malicious contamination and product extortion. Costs could include: testing food stuffs, setting up emergency phone lines, the additional transportation for recalling or withdrawing products and the additional staff required to man the recall.
Sales and marketing costs reasonably incurred to re-establish the sales level and market share of the affected product would also be covered, as well as the costs associated with replacing contaminated products or reimbursing the costs of these products where a replacement is not possible.
Business interruption costs and loss of profit for a food company would also be covered by the insurance if a supermarket it was supplying was forced to recall one of the supplier’s contaminated products. Similarly, there is an extension available to cover the loss of profit experienced by the supermarket itself.
However, the insurance would not cover the loss of profit resulting from a product recall for those above the insured in the supply chain.
What cover will the insurance provide?
Once an insured event has been identified, the policy will pay out for a range of losses including:
- Pre-recall expenses
- Recall expenses
- Third party recall expenses
- Loss of gross profit
- Rehabilitation expenses
- Increased cost of working
- Product extortion demand.
The majority of product recall policies also give clients access to a crisis management consultant, the value of which cannot be underestimated. Imagine, for example, the plight of a food manufacturer that has just discovered salmonella in one of its sauces.
How is the source identified? How is the production site sealed? Was the contamination accidental or malicious? Who carries out tests to verify the discovery? Who manages the communications to staff, customers and suppliers? Who liaises with the Food Standards Agency and the Health and Safety Executive? What information do they need and what format must it be supplied in?
Crisis management consultants can provide onsite crisis scenario training, where they will put together a relevant and live scenario and play it out. This lets everybody see how the crisis management team reacts to the scenario and where improvements can be made.
There are also other pre-loss services to help contain a loss, including a documentation review, crisis management training and mock audits. These audits let firms see if their processes and practices are compliant and can be extended to examine the entire length of the supply chain. Whilst training will help companies keep employees up to date with the latest industry guidelines and regulations.
Tips when buying cover
The first thing to decide is what heads of cover to buy – this is a decision that individual companies must make for themselves with advice from their broker.
Some companies only buy malicious contamination or accidental contamination as it is a contractual requirement demanded by a certain customer. Companies have to strike a balance between the cost of a policy, where they feel their main exposure is and the exposures they want to keep off their balance sheet.
When buying insurance companies will typically have to provide information (usually in a questionnaire) on the nature of their business, the products to be covered, the share they represent of total sales and the share they have in the market.
In addition, insurers will want to know where the products are sold, the companies they are sold to and whether products are component parts of other products. As with any insurance, policies are based on utmost good faith and any non-disclosure of material facts can invalidate the cover in its entirety.
How does this differ from product liability?
It is also important to understand the difference between product liability and contaminated product insurance. Product liability covers a business’s liability arising out of their product causing third party bodily injury or property damage. Contaminated product insurance covers the recall costs of any product which has, or is imminently likely to cause third party bodily injury or property damage. Interestingly enough, if a client was to purchase both covers, then a recall policy could save far more significant costs than a product liability policy, if that contaminated product can be recalled before it can cause bodily injury claims.
At JLT we specialise on providing bespoke programme design and policy coverage to fit the needs of individual insureds, taking into consideration both industry and individual exposure profile.
For further information, please contact Jon Miller, Head of Regional Food & Agri Practice on +44 (0)121 676 7806 or email email@example.com
Find out more about our Food & Agri practice