Product recall and contamination insurance

Recent high-profile product recalls have focused an uncomfortable spotlight on failures of product safety and contamination prevention processes, highlighting the need for comprehensive risk management and insurance to manage the onerous reputational, financial and legal repercussions of a large-scale product recall.

Tony-Webster
Toney Webster of insurance brokerage and risk advisors, Aon South Africa

‘Product recall and contamination insurance is relatively commonplace among most large commercial and multinational operators,’ says Tony Webster of insurance brokerage and risk advisors, Aon South Africa. ‘However, most small to medium-sized commercial businesses have not kept pace with the need for this essential cover, and are at huge financial and legal risk if a product they have supplied – or even a component of a final product – is the subject of a product recall due to material risks posed to consumer health and safety. The reality is that most small operators only think about how to manage a product recall when it’s too late. For a smaller company without the financial and marketing backing of a large parent company, the consequences could be dire.’

In particular, the risks in the food processing industry are marked, and here every operator in the supply chain – from farm to fork – must take due care of the products and ingredients within their care – from growers, processers to logistics providers, wholesalers, distributors and retailers.

‘A thorough risk identification process is at the heart of establishing exactly where the risks are and what your business is liable for. This is a task best undertaken with the aid of a professional insurance broker by your side in order to formulate a holistic view of all the risks that your business is exposed to, what measures to put in place to manage and mitigate the potential exposures, and then having an appropriate insurance plan in place that will respond favourably in any given situation,’ Webster recommends.

Product recall and contamination insurance provides cover for unforeseen and accidental events that can jeopardise product integrity and safety. ‘The insurance policy will cover the cost of withdrawing and recovering the stock from the shelves, transport costs, staff overtime, the costs to repair, replace or destroy the product, the subsequent loss of profits and the crisis communication efforts needed to keep the brand integrity in check and to advise consumers of the product recall,’ says Webster.

The biggest impact associated with a product recall is reputational damage. ‘Social media can rapidly exacerbate and escalate any product recall situation,’ Webster adds, ‘unless handled properly. It is therefore crucial to respond rapidly in an emergency and to take particular care with the message being communicated to your customers, as it may ultimately influence the severity of the loss and the consumer sentiment post recall. Then there are also the business interruption aspects associated with a product recall where a site or production line may have to be completely shut down due to contamination.’

Product recall insurance on its own is also not sufficient to address the multifaceted risks in the food supply chain, as there are also liability aspects to consider, including the potential for legal class action in severe cases. An all-encompassing liability insurance programme is essential.

‘If the product causes harm to a person, there are two additional scenarios that come into play from a liability point of view,” explains Webster. “Product liability cover would provide a solution to any injury or damage that the product may cause, for example a product that is incorrectly labelled, like not listing nuts as an allergen. Directors and Officers (D&O) Insurance would also come into play where a person in a supervisory position did not practice due diligence in their role, and faces being held liable in their personal capacity for any legal claim that may arise.’

It is crucial for all role players in the supply chain – large and small – to fully interrogate the extent of their exposure and all potential sources of risk. ‘Even a seemingly small ingredient or component supplier could be drawn in as a co-defendant if there is a liability claim, with the Consumer Protection Act providing significant protection and recourse for consumers against all role players in the supply chain. The legal defence costs alone have the potential to bankrupt smaller operators, hence the imperative to have comprehensive insurance to protect the business from those risks that simply cannot be mitigated or foreseen,’ says Webster.

‘Having an experienced team of professionals versed in the intricacies of product liability and recall insurance is essential, as is a customised insurance programme that addresses your unique risks and risk-bearing capacity, even more so if you are operating across borders. Product recall costs can run into millions of Rands and quickly spiral out of control unless properly managed. The most important consideration is the ‘total cost of risk’, where the costs of recall insurance are dwarfed by the potential catastrophic consequences for a business of a recall that threatens human life or limb,’ concludes Webster.