From farm to fork

As new European Union regulations look set to place more stringent requirements on food safety at each stage of the food production process, Adam Parsons stresses the importance of product recall insurance

The risk of having to recall a contaminated or defective product must be a major concern for any manufacturing company - products of one kind or another are recalled or withdrawn almost weekly in the UK. The costs can be significant, including everything from testing to determine the scale of the problem; physically retrieving, storing or destroying affected produce; re-supplying customers; and media costs involved in alerting consumers and subsequently rebuilding confidence in product and brand.

European Directive 2001/95/EC defines manufacturers' legal duties and responsibilities in relation to the safety of general consumer products.

One sector that will feel its effects is that of food manufacturing, where microbiological contaminants such as campylobacter, listeria and salmonella pose a constant threat. Additional threats come from chemical contaminants, such as cleaning fluids, in addition to allergens, like peanuts, and foreign bodies such as glass and plastic.

Across the pond

Continental Europe and the UK work on a similar basis to the US in terms of food and drink regulation. Across the Atlantic, the issue is the joint responsibility of the US Department of Agriculture's Food Safety Inspection Service and the Food and Drug Administration. A rigorous safety methodology based around hazard analysis critical control points - HACCPs - has evolved that focuses on close review and control of every stage of the process from 'farm to fork.'

This more stringent approach is on its way to being adopted in this country.

The UK's Food Safety Act 1990, has recently been overtaken by EC Regulation 178/2002, which lays down procedures on food safety. This legislation came into effect on 28 January this year, and moves European practice significantly closer to the US HACCP-focused model. Importantly, it states that the traceability of any "substance intended or expected to be incorporated into a food or feed shall be established at all stages of production, processing and distribution".

The regulation also highlights and clarifies manufacturers' responsibilities, stating that if any business operator has reason to believe that produce may not comply with food safety requirements "it shall immediately initiate procedures to withdraw the food in question". Against this backdrop, an increasing number of companies are seeking to protect themselves against costs they may incur in the event of a recall initiated either by themselves or by another company to whom they are a supplier and who may subrogate to them.

Crucially, contaminated products expenses cannot be reclaimed under any other type of cover apart from product recall. A growing number of risk managers, finding pricing has become more attractive on other more mainstream insurances, are taking out what is still a relatively niche cover but one that provides a unique source of financial protection against a threat that can potentially undermine a brand and destroy a company. Another key driver for the rising uptake in this country is that a growing number of food manufacturers and retailers now stipulate in their contracts with suppliers that they should have product recall cover in place.

Product contamination policies typically provide cover against the majority of costs associated with a product recall where the products concerned may reasonably be expected to cause harm within 120 days of purchase.

This would include all costs directly relating to the process of recall, including the physical withdrawal, replacement and/or refunding of the affected produce. Where produce was supplied to a supermarket, the cover could even extend to 'slotting' fees paid to place the goods in a prominent display position.

Loss of profits cover and reimbursement for media and communications spend are obviously key cover elements - the latter in particular can prove a significant item, though sub limits will typically apply, and it is important to take an informed view on the level of cover required.

Specialist wholesale brokers, with detailed knowledge of the product recall market, can advise companies of all types and sizes on what cover is available to meet their requirements.

Policies will respond to an accident or error during the manufacturer handling, storage or distribution process or as a result of malicious contamination within the factory or once sold at the retail end - either actual or merely claimed by a would-be extortionist or pressure group.

Most people will be aware of high-profile tamper instances of these phenomena in the form of the claimed adulteration of well-known soft drinks and chocolate bar brands in recent years. Cover would not, however, apply where a manufacturer chose to recall simply on the basis of non-injurious factors such as product inefficacy or discolouration.

Total recall

Managing a product recall is no simple matter. Without detailed planning and careful execution, mistakes can easily be made that will badly hurt a company's reputation and customer relationships. To take a recent example from the US, a poultry production facility was affected with listeria.

The plant was shut down and a thorough and effective clean-up was carried out under close inspection from the USDA.

In many ways the situation was well managed but the key mistake made by the three-man crisis management team, formed following the incident, was its "no comment" statement to the press on a Friday night. This left the media to draw its own, less-than-positive, conclusions over the weekend, resulting in significant brand damage and loss of consumer confidence.

As with most business risks, the ideal response combines sound risk management planning and practice with appropriate cover to address the financial consequences should an incident occur. Active assistance with the crisis management planning aspect of product recall is a valuable part of the offering of major insurance carriers active in this sector. As the law on food safety becomes increasingly well defined and exacting, the time has surely come for all UK food manufacturers to factor the impact of a product recall into their insurance and risk management provisions.

- Adam Parsons is underwriter in the crisis management team at QBE.

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