Outbreaks from Eggs, Romaine Lettuce Show Need for Product Recall Coverage

Major recalls of romaine lettuce and more than 200 million eggs this past week are impacting millions of U.S. consumers. As new information is made available on the causes of these food contaminations, the financial consequence to the suppliers and distributors involved is expected to be significant depending on the type of Product Recall Insurance they had in place.

“The liability assigned to organizations involved in food recalls will vary significantly,” said Michael Muglia, Underwriting Manager, Professional and Executive Liability Center of Excellence, Burns & Wilcox. Suppliers and distributors in particular need to have a broad Food and Drink (Product Recall) policy with limits and coverage appropriate to their exposure, due to the potential wide-reaching liability assigned to them. This is particularly true when a “core ingredient” that is a part of many other food items is contaminated.

“One ingredient can cause a massive product exposure,” Muglia said. “There is a tremendous amount of research that goes into verifying an incidence of product contamination and tracing its cause. Once the cause of contamination is confirmed, organizations have to remedy it, issue a public alert to everyone in the supply chain, and they still have to pay their employees while dealing with the continuing public relations fallout.”

Product Recall Insurance can help cover a range of recall costs, from destruction and replacement of the recalled product, to consultant fees for professionals responsible for identifying the issue, managing public relations, temporary facility costs, employee payroll, loss of revenue and business interruption and more. Organizations should work with their insurance specialists to determine the type of coverage required to best protect their interests.

The margin is often very low in the food service industry, so for any of these companies, a change in revenue is significant, and the right insurance coverage can help with some of these costs. – Michael Muglia, Burns & Wilcox

“In the wake of a costly recall, Product Recall Insurance helps to address costs associated with restoring brand image, public outreach and even future advertising. More than anything it protects an organization’s balance sheet,” Muglia said.

Recent food recalls could cripple organizations

While Product Recall Insurance is available to organizations in a range of industries that provide products to consumers, it is particularly important to those in the food industry. Recently, an Indiana company recalled more than 200 million eggs that came from its North Carolina farm due to salmonella fears. The eggs were sold through numerous retail stores and restaurants in nine states. The U.S. Food & Drug Administration (FDA) said 22 illnesses had been reported.

Meanwhile, the Centers for Disease Control and Prevention (CDC) identified Arizona-grown romaine lettuce included in ready-to-eat salads as the cause of an E. coli outbreak that is impacting consumers in at least 11 states. Consumers and restaurant owners have been asked to throw out chopped romaine lettuce if there is any doubt as to whether or not it is impacted.

Organizations further down the food supply chain such as restaurants, supermarkets or local grocers and bakeries should also have some level of Product Recall Insurance. A foodborne illness policy could help insure the costs associated with a situation of improper food preparation or contamination from an infected food service worker’s communicable disease.

Even for smaller food service providers, insurance is recommended. “The minimum cost of a claim relating to foodborne illness for any restaurant is likely to be in the thousands,” Muglia said. “A food service business generating less than $1 million in annual revenue would have difficulty surviving the financial impact of a foodborne illness event, without an insurance policy to protect its assets.”

These types of organizations may be reimbursed for their losses by suppliers, distributors or the company found to be liable, assuming there is money available, which often depends on the financial state of the larger company, he added.

Lessons from past food recalls

The impact of not properly addressing a food contamination can be significant. In 2017, SoyNut Butter filed for bankruptcy and planned to liquidate its assets after some products were recalled because of an E. coli outbreak. Blue Bell, once the nation’s third-largest ice cream maker, saw revenue drop from $680 million in 2014 to $228 million in 2017 and cut a third of its staff after Listeria outbreaks in 2015 and 2016. General Mills suffered brand damage in 2016 after a recall of flour products linked to an E. coli infection. In 2015, Chipotle was linked to 60 people from 14 states infected with E. coli. In every case, having comprehensive Product Liability coverage would be paramount to covering costs associated for the affected manufacturers and distributors.

A retail broker or agent can help their client understand their risk by exploring the overall supply chain and how all levels down to the consumer could be impacted should their product fail. The risk and impact to their business is often much more than they expected. – Nicole Greene, Burns & Wilcox

“The margin is often very low in the food service industry, so for any of these companies, a change in revenue is significant, and the right insurance coverage can help with some of these costs,” Muglia said. Food service businesses further down the supply chain often require adequate cash flow to pay for next month’s supplies, therefore claims of thousands and tens of thousands of dollars can be crippling, he added. Specific Product Recall policies like restaurant and supermarket contamination should be considered.

“Business interruption following a foodborne illness or recall event, can quickly add up,” Muglia said.

Product recalls will remain a hot issue

Increased regulations and public awareness, especially over social media channels, make protecting products more important than ever. “Data from the Consumer Product Safety Commission shows a 108 percent increase in recalls (across all industries) in the past decade, which equals more than 3,300 recalled consumer products,” said Nicole Greene, Associate Vice President, Professional and Executive Liability Center of Excellence, Burns & Wilcox.

Common Product Recall policies offer first party coverage for loss of profit, rehabilitation expenses and replacement costs. Third party coverage may include the customer’s loss of profit and rehabilitation expense.

Greene said that businesses may not consider how their products fit into the overall supply chain. For example, some manufacturers only consider their risks relative to the number of parts they sell or number of customers with whom they have relationships.

“When a product is recalled, often there is one piece of the overall manufacturing process to blame,” Greene said. “A retail broker or agent can help their client understand their risk by exploring the overall supply chain and how all levels down to the consumer could be impacted should their product fail. The risk and impact to their business is often much more than they expected.”

As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.

This information was provided by Burns & Wilcox, North America’s leading wholesale insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent if a Product Recall policy is right for you.