Sweet talk

sep14-highlight3-gif

With a greater emphasis on companies to be open about the safety of their products, Sam Barrett reports on how the insurance industry can help sweeten the financial blow

Product recalls are undeniably on the increase. Figures from Pricewaterhouse Coopers show that although there were only 16 recalls in the UK during 2004, this increased to 43 in 2005, and the numbers are set to rise even higher for 2006. So far, more than 70 products have been recalled by the UK's trading standards bodies this year, ranging from the high-profile recalls of Cadbury Dairy Milk products and Dell's notebook computer batteries to the - perhaps lesser known - recalls of Co-op's beef paste and Asda's carbon steel hand axe.

At first glance, it may appear that consumers are living in an increasingly dangerous world but the rise in recalls is more likely to be a result of the new requirements under the General Product Safety Directive. This European Union directive, which came into force in the UK last October, puts a greater emphasis on company directors to be open about the safety of their products and take action where necessary to protect the public.

Nick Marsh, an associate in the litigation group at DLA Piper, explains: "The biggest change is that where manufacturers are aware of a defective or dangerous product they must notify the relevant authority of the risk within seven days."

Typically, the relevant authority would be the local trading standards office where the company is based, unless there is a separate, industry-specific regulatory authority that must also be notified. This means that, unlike under the previous regulations where companies could investigate the problem before going public, companies may find themselves having to take action to prevent harm to consumers, even though subsequent investigations may reveal the risk was minimal or non-existent.

Failure to notify once aware of a problem puts directors at risk of prosecution and, ultimately, a prison sentence. Under the GPSD, the maximum sentence is three months while the Food Safety Act carries a separate maximum sentence of two years. Although the new requirements mean that a much faster response is necessary, which is likely to involve greater costs, this is not necessarily a bad thing.

"If a company acts quickly, the public sees it as responsible. If there's a perception of a cover-up this compounds the repercussions of producing faulty goods," says Paul Llewellyn, partner and head of product liability at Reed Smith.

Despite the fact that the new requirements have been in force for almost a year - and further highlighted as a result of some high-profile recalls this year - awareness among companies of their obligations is not as high as it should be.

"We have seen an increase in recalls as larger businesses have tended to err on the side of caution but, anecdotally, I've heard that some of the small to medium-sized businesses aren't aware of the new requirements," says Mr Marsh, adding that he believes it will not be long before there are cases where directors are prosecuted for failing to comply with the directive.

Awareness is increasing, however, and this is having a knock-on effect in demand for recall insurance. Tina Kirby, underwriter for product recall at Beazley, comments: "As companies are becoming aware of their requirements under the GPSD they're also getting a better understanding of the insurance available. There has been a lot of confusion between recall insurance and liability insurance and the directive is helping to clarify this."

Recall remit

While liability cover is an essential part of the mix - should any third-party suffer an injury as a result of a faulty product - recall insurance has a much more immediate remit, covering everything from the cost of recall and lost sales to the rehabilitation of the company following recall and consultancy fees.

While the financial cover is important, many believe it is the access to consultants - should a recall be required - that makes this a vital insurance product for any company involved in the manufacture and distribution of products.

"It's about balance sheet protection but customers benefit hugely from the access they can get to a broad range of consultants, who will be able to advise them on everything from the mechanics of a recall and how to source a landfill site to communicating with customers and the authorities," says David Burke, class underwriter at Catlin. "We are seeing a lot more enquiries as people become more aware of their exposure."

Another key change in the market that is forcing companies to consider recall insurance is the increased importance of brand. For example, many supermarkets' brand goods are produced by other companies, although their names never appear on the packaging. Therefore, to protect their brand, supermarkets insist on quality and to encourage this will often pass liability down the chain if there is a safety issue.

Ian Harrison, director in programmes and facilities at Miller Insurance Services, explains: "Retailers are putting strong contract requirements into their own-name products. The internationalisation of the food market has made the food chain much wider."

Market growth

As interest is this area continues to grow, so too does the market supporting it. Catlin launched a crisis management underwriting team earlier this year, although with few other underwriters active in the primary market - AIG Europe, Beazley and QBE Insurance among them - it remains a highly specialised area.

Despite being a small market, there appear to be no complaints about the ability to find cover. "These players are increasing their capacity and there are also more players in the excess market now," says Jeremy Moore, vice-president of Marsh's risk consulting practice.

However, the depth of cover and potential claims costs mean insurance protection is not cheap and subsequently there is a high level of self-insurance. "Some companies decide they are confident enough with their own safety procedures and only need the cover for recalls resulting from malicious tampering - others buy what they can afford," says Ms Kirby.

Deductibles and co-insurance are also common. Mr Harrison says that it would be fairly standard for a $1m (£529 431) policy to have a $25,000 deductible and 10% co-insurance. "Many companies will have cover on this basis," he says.

While the number of recalls may be rising, this does not necessarily mean claims costs are. For a recall claim to be valid, it must meet certain criteria. David Page, executive director in global markets international liability at Willis, explains: "There is normally a manifestation period on policies; for instance, 90 or 180 days. Companies must be able to prove that someone did or could have suffered a bodily injury in that period, otherwise it won't trigger a claim."

Furthermore, while the purpose of many recalls is to protect consumers, this is not always the case. For instance, manufacturers might recall products because of incorrect labelling or a sub-standard ingredient being used. "Companies have recalled products because there is an issue with flavour or colour," says Trevor Davies, senior partner with Davies Lavery. "This could damage their brand but, if it couldn't cause harm, there would be no trigger for a claim."

Additionally, even if there are more valid claims, more robust risk management has helped to ensure that companies react quickly and reduce the severity of the incident. As a result, risk management is an essential part of the mix and the underwriters will insist that adequate safety procedures are in place.

Alex Murray, director of Fitzgerald Consulting, comments: "Companies need to put strategies and procedures in place to deal with these problems at the outset. If something happens, the company, its insurer and its PR consultant will need to make a quick decision about how to deal with the situation."

Having a robust crisis management plan in place is essential, helping to ensure brand protection as well as improving terms with insurers. "Underwriters give a lot of credit to crisis management planning. Good planning might result in a discount of between 10% and 15%, although if there isn't any in place it's more likely to result in a loading," comments Mr Harrison.

Higher levels of 'good business practice' means firms are more likely to have plans in place. For instance, Ms Kirby says that when she started writing recall insurance it was unusual to see such plans in operation among SMEs but now it is fairly standard.

Crisis gaps

Underwriters can also help. At Catlin, Mr Burke says that where there are gaps in crisis management, rather than turn the risk down, its consultants help companies get up to speed.

Preparation certainly pays off, as Eben Black, head of media at DLA Piper's strategic communications arm Global Government Relations, explains: "Doing nothing is not an option - if a problem occurs then a company must be open and honest. A company can get over a technical problem but it'll never get back its reputation if it loses it."

A good example of this is Coca Cola's bottled water, Dasani. A major seller in other countries, including the US, it lasted just five weeks in the UK when it was launched in 2004. After public outcry that it was no more than treated Sidcup tap water, it was found to be contaminated with bromate, a potential carcinogen. The product was immediately pulled and there are no plans to return it to UK shelves.

After all, whatever the size of the company, although the logistics of a recall will cost, a well-handled recall can actually enhance consumer confidence. Managing it correctly can make or break a business.

HOW THE GENERAL PRODUCT SAFETY DIRECTIVE AFFECTS CLIENTS

Whether it is a manufacturer, importer or retailer, any business involved in the supply of products needs to be aware of the requirements that came into force with the introduction of the General Product Safety Directive in October 2005. These requirements mean that companies have to take a more open approach to product safety. In particular, they have seven days in which to notify the local trading standards officials if they believe there is a potential risk to the public from a product they make, sell or import.

"At the first signs of an unsafe issue, a full investigation should be undertaken and the authority immediately notified of the plan of action and their agreement obtained," explains Tom Battell, pictured, director of Adjusting Solutions. "Criticisms of late notice or incomplete investigations can then be laid aside. A minor, local and incomplete recall that is followed by an extensive global recall can be counter-productive."

Trading standards can force companies to recall products, although where this is the case - providing the company follows the recommendation - they can make it look as if they have acted freely.

The directive also requires companies to take a much more proactive approach to record keeping. Throughout the supply chain, companies must be able to demonstrate a product's traceability, at least one up and one down the supply chain.Once a safety problem is identified, detailed records are required outlining what has happened to ensure that the danger is removed from the market.

The authorities also have more power under the new directive. As well as the possibility of a fine of up to £5000, directors who fail to comply with the new requirements face prosecution and a potential prison sentence. Under the GPSD, this is a maximum term of three months, although there are longer sentences under other product safety legislation. For example, under the Food Safety Act, a director can be jailed for a maximum of two years.

"Companies need to move from a passive to an active role with regard to product safety," says Alex Murray, director of Fitzgerald Consulting. "They need to discuss how they'd deal with potential recalls before they happen. Without a structured approach, there could be chaos."

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@postonline.co.uk or view our subscription options here: http://subscriptions.postonline.co.uk/subscribe

You are currently unable to copy this content. Please contact info@postonline.co.uk to find out more.

How maritime insurers are helping shipowners decarbonise

Following the European Union’s Emissions Trading System coming into force for the maritime transport industry on 1 January, Fiona Nicolson explores how shipowners, operators and insurers have come to terms with the implications and effects of the new regulations.

You need to sign in to use this feature. If you don’t have an Insurance Post account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here