The Courier & Advertiser (Fife Edition)
Wrong insurance will cost companies more than peanuts
INSURANCE AND RISK MANAGEMENT: Product protection
The level of safety and quality of a company's product is a shop window
A recent newspaper article reported that a supermarket recalled packets of peanuts - because they did not say they contained nuts on the label.
The level of safety and quality of a company’s products is a shop window into their brand. Therefore, any kind of design fault, internal manufacturing error, malicious tampering, or similar, will have a significant effect on their reputation and ability to win customers.
Product recall insurance provides support in this regard, through protecting a company’s balance sheet, revenue and contracts. It is becoming more and more important, particularly in the food and drink industry, as a result of new laws, higher safety standards, increasing regulation, more complex supply chains, heightened consumer awareness and instant communication.
It should be emphasised that Product Liability insurance is not a direct substitute for Product Recall insurance, as Product Liability insurance is only triggered if a product enters the supply chain and causes physical damage or bodily injury.
Arguably the bigger opportunities and exposure may exist with product liability and general liability cover for commercial organisations, where more extensive cover may be necessary in the future. Product liability exposure should be carefully managed with regards to food safety.
With both Product Liability and Product Recall, insurers should be aware of the level of risk and the capital implications. There is a certain amount of overlap between Product Liability and Product Recall as the following example shows.
In 2009 the US Food and Drug Administration issued a recall of products distributed from Peanut Corporation of America (PCA)’s Plainview, Texas facility because of suspected salmonella contamination posing a significant threat to food safety.
In total almost 4,000 products made with peanut butter and peanut paste produced by the PCA were recalled from just fewer than 400 companies.
The contamination resulted in over 700 confirmed infections and at least nine deaths and civil lawsuits were filed across the country. PCA filed for bankruptcy and their CEO was obliged to appear before Congress under Congressional subpoena. The peanut industry suffered losses of $1bn, sales fell 25%, and companies refocused on their reputations for safety in order to distance themselves from negative press.
This case shows how food safety issues can have significant financial and reputational impacts on businesses.
The Peanut Corporation of America case is one of the reasons for closer regulatory scrutiny and highlights the catastrophic effects of a product recall – in this case, one where liability claims also featured.
Product recall and liability claims are not only risks for the businesses accused and responsible, but also those across the supply chain and industry. It is reported in 2010, less than 10% of food manufacturers had product recall insurance, with the majority relying on traditional product liability cover.
On the whole, this was not an informed choice; businesses were unclear of the benefits and coverages of both, in many cases mistakenly thinking that their liability policy would pay out in the event of recall when in fact it would not.
This demonstrates the importance of having the correct insurance cover as well as understanding the risks associated to your business.
James Geekie is development director at Dundee insurance brokers, PIB Limited.