Insurers: Product Recalls a ‘Death Sentence’ to Food Manufacturers, Coverage Demand Still Lags

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by Amy O'Connor

Food recalls are on the rise, but that isn’t necessarily because food manufacturers are not meeting safety requirements and more food is contaminated or unsafe. In fact, insurers in the product recall space who insure food manufacturers say safety standards are higher than ever before, thanks in part to the Food Safety Modernization Act (FSMA) of 2011.

According to, the FSMA has increased the frequency of inspections of food facilities by the FDA, required certain food testing by accredited laboratories, and given the FDA access to the records of industry food safety plans. All of this – and more – is being done to “ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it” according to the site.

The FSMA also gives the government the authority to issue a mandatory recall whenever there is evidence or concern a facility’s food item could be contaminated, and when the food manufacturer does not voluntarily conduct a recall when asked. Since the FSMA was enacted in Jan. 2011, however, no mandatory recalls have been issued, says John Turner, North America product recall underwriting manager for XL.

“If the FDA finds an illness is related to your facility and says ‘we would like you to voluntarily recall,’ the vast majority of food manufacturers comply with that request. You could debate if that is really voluntary, but technically it is,” he says.

Turner says companies know it is in their best interest to recall a product because they will have a difficult time restoring consumer confidence if they are ordered to recall their food products by the government.

“It shows that you were put in a position kicking and screaming, and that’s not good – particularly in the current era of social media,” he says.

But a voluntary recall is still a recall, and that means there are huge costs for the company to incur – both financial and reputational – so product recall is an important coverage for companies to buy.

“Without proper product recall coverage, a large recall could be a death sentence to a company,” says Louis Lubrano, senior vice president of Global Crisis Management for Liberty International Underwriters.

Product recall coverage typically includes all the costs associated with recalling a product, including pulling it from store shelves and replacing it, as well as crisis management to handle the fallout from the recall. Some policies include third-party coverage as well, to reimburse costs incurred by someone else as a result of the recall. Product recall policies also typically provide risk management services that help insureds implement effective protective controls to ensure a product is manufactured safely.

For the food industry, carriers may offer product contamination coverage, which is triggered by a contamination or mislabeling discovered before a product has left the facility, not after a recall has been ordered.

Turner says the increased product recall headlines and scrutiny by the FDA has not been enough to significantly increase demand for product recall coverage.

“The coverage is still seen as a luxury buy. It is customary practice to buy general liability but not product contamination insurance, even though the risk is a business killer,” he says. “Because of the FSMA and big companies requiring [their suppliers] to have the coverage, that is changing, but more slowly than we would like.”

Lubrano says LIU has seen more interest in recall coverage because of the FSMA, but there has also been an increase in claims industry-wide.

“For an insurance carrier, it is a double-edged sword,” he says.

Lubrano and Turner say that thanks to a major influx of capacity over the past two years, rates have stayed flat or increased very slightly.

Lubrano says just five years ago, there were half as many carriers in the product recall/product contamination marketplace, but that is a reflection of the industry’s opportunistic nature.

“If there is a need, the insurance industry will step in and fill it; successful companies will do it profitably,” he says. “To get in the business is one issue, but how you conduct yourself in the business is another issue.”

Turner says considering the increase in risk, the rate levels aren’t ideal, but that is the state of the market. He says carriers differentiate themselves from the increased competition by what coverages their policies provide.

For example, XL’s crisis management consultants only work with XL, so they are not spread too thin when a recall occurs. “There can be tens, if not hundreds, of manufacturers involved in one recall, and we want our clients to get that service right away,” he says.

The carrier also launched a government recall endorsement for voluntary or forced recalls when it launched a new product recall policy for the food and beverage industry in 2010.

LIU has been working on its own market differentiators. It recently launched a product recall policy tailored to the packaging industry, including manufacturers of packaging for food and beverage products. The new Packagers Protection policy offers a form with product recall, product contamination or manufacturing errors and omissions as the potential trigger.

Lubrano says the company has had requests from the packaging industry for a product like this because of the complexity of the food supply chain process and the difficulty of quickly identifying where the source of a contamination occurred. Food packagers often incur third-party costs associated with a recall, even if they are not responsible for the contamination.

“Before this product, a food packager could buy a broad product recall policy or contaminated product policy, but nothing was specifically tailored to the packaging industry like this policy is,” he says.

The coverage also includes crisis management services from red24, the firm that LIU uses for specialized loss control engineering and loss mitigation services.

“Insurance agents and brokers and suppliers need to understand you are exposed wherever you are in the food chain. From growers to the retail level you can contaminate a product and have the exposures,” Lubrano says. “There is no specific niche that doesn’t need this coverage.”

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