Over the past 12 months there has been an increase in enquiries from companies in the food, agribusiness and beverage (FAB) industry as a result of updates to contractual liability clauses with major UK customers, and an increasing frequency of high-profile recall events involving a diverse range of companies operating in the FAB supply chain.
Manufacturers and suppliers in the FAB industry often sign up to supply contracts with retailers which include indemnity clauses to reimburse costs associated with a recall event. Other contracts may specifically require insurance for such events. These obligations can be missed or misunderstood, so it is recommended that a review of customer contracts is completed to identify any uninsured or unintended obligations.
It is a common misconception that only large manufacturers need to take out product recall insurance; any size company can be affected by the need to recall an unsafe product, and it is the smaller companies which may struggle to meet the costs of a recall without the assistance of insurance.
Key Definitions and Differences
Product recall and product liability insurance represent two distinct insurance products, which in most cases have fundamentally different scopes of cover. However, both can be relevant in the context of a product recall incident, particularly if the circumstances include personal injury or property damage caused by the product.
In such circumstances, the product recall policy may respond to the costs associated with recalling the product, while the product liability insurance may respond to any third-party liability claim arising from personal injury or property damaged caused by the product. In most cases, both the product recall insurance and product liability insurance triggered by the incident involve bodily injury or property damage caused by the product. However, each policy has a different scope of cover due to the difference in wording triggers.
| |
Product Liability Policy |
Product Recall Policy |
| Cover for own losses – damage to own property |
No |
Yes |
| Cover for third-party losses |
Yes – where legally liable but typically needs to be bodily injury or property damage to a third party |
Yes - Can be extended to cover third party liability and third-party loss of revenue |
| Removal; replacement; re-distribution; destroy cost |
No |
Yes |
| Error in design, manufacture, packaging, blending, mixing, labelling or storage of the insured product |
Yes – Only if there is resultant damage to third party property or third-party bodily injury |
Yes - Covers potential as well as established damage |
| Malicious or threatened tampering, alteration or contamination |
No |
Yes |
| Product extortion |
No |
Yes |
| Loss of the insured revenue |
No |
Yes – usually up to 12 months |
| Brand rehabilitation |
No |
Yes – promotion / advertising cost |
| Government mandate recall |
No |
Yes |
| Negative media trigger / drop of revenue |
No |
Yes |
| Respond prior to an actual claim |
No |
Yes – Consultant pre-incident service; 24/7 helpline; Response consultant to mitigate exposure |
| Consultant costs |
No |
Yes – Can be unlimited |
In particular, the triggers for these would see the recall policy initiated first, as recall policies must only show that the product may cause bodily injury. On the other hand, product liability would only respond once bodily injury or property damage has occurred.
The potential reputational damage and claims experience associated with each policy may also vary significantly. Product liability claims often see a longer claims experience, with the possibility of claims being settled without any admission of liability by the defendant manufacturer. Product recall claims are more immediate, with greater potential ramifications for the brand.
Product Recall Policies for FAB Organisations
Food and beverage recalls are generally initiated due to one of the following issues affecting the products:
Allergen
A food product may contain ingredients such as peanuts, milk or eggs that are not identified or incorrectly identified on the label. These can cause adverse reactions in people who are allergic.
Chemical
A food product contains chemical residues such as lead, mercury or pesticides that, at certain levels, can affect human health.
Extraneous material
A food product contains material from an outside source, such as metal, glass or hair. These are not necessarily a risk to human health.
Microbiological
A food product is contaminated by microorganisms, such as bacteria, viruses or parasites, which have the potential to cause illness.
Other
A food product is of concern due to the presence of a hazard that does not fall within one of the above categories. Examples include non-permitted ingredients, nutrition concerns and potential tampering.
Recall Risk Transfer Options
Appropriate risk management of product recall exposures involves many aspects that are both product-specific and enterprise-wide. From a product risk perspective, insurance underwriters delineate not only the relative risk of a product, but also whether or not the end product is used directly by the consumer or if the product is a component or ingredient that may become a part of the final or end product. The interplay between products may significantly influence the exposure and the appropriate management of the risk.
Product Contamination Insurance
Product contamination insurance policies provide coverage for the risk of a contamination event that renders the product unsafe or dangerous if consumed or used. The product need not necessarily be the subject of a recall. For example, if the product has not yet been distributed, but is found to be contaminated, certain coverages under the policy may be triggered under contamination policies. Product recall insurance, which is more commonly used for non-food products, generally requires that the product has actually been recalled for the policy to be triggered.
Insured events typically found under product contamination insurance policies include:
- Accidental contamination
- Malicious tampering
- Government recall
- Adverse publicity
- Intentionally impaired ingredient
Insured Losses
Covered losses for product contamination policies are highly customisable, but generally may provide reimbursement for losses across a variety of categories.
Product contamination or recall insured losses include:
- Pre-recall expense
- Extra expense
- Recall costs
- Brand rehabilitation
- Repair, replace, refund
- Third-party recall liability
- Business interruption
- Crisis consulting expense
Contact Us
Richard Fawcett
Industry Leader, Food, Agribusiness and Beverage
+441212533358
[email protected]
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