Product recall coverage can protect the bottom line

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Product recall coverage can protect the bottom line

18 Apr 2023

Joe Buick

Joe Buick, a certified insurance counselor and certified risk manager, has more than 25 years of experience in the commercial insurance industry. He and his wife, Rebecca, own D’Vine Cookies in Ferndale, MI. Contact him at jbuick@oswaldcompanies.com.

KANSAS CITY, MO — A risk management program for a large food producer is not complete without at least the consideration of a product recall policy that includes contamination coverage. As sales rise, compliance requirements expand, customer requirements grow, and the likelihood of a product recall increases. To offset the potential financial loss that can follow, product recall coverage is a viable solution.

This type of coverage has been in existence since the ’80s. In its early stages, coverage premiums were high — starting at six figures — and capacity was scarce. Today, there are at least 50 facilities that offer product recall coverage. Writers of this line include standard carriers, specialty carriers, managing general agents (MGAs) and London-based groups.

Because the available capacity has greatly increased over the years, coverage options have broadened, making higher limits available and trending premiums downward. In fact, for a food producer with strict controls, few losses and higher deductibles, premiums can be as low as $5,000 annually, depending on the limit chosen.

That said, ratings are based on annual sales, so premiums will likely increase with the size of the manufacturer. However, it’s important to note that coverage is available across the full spectrum of food-related risks, including growers, processors, producers, handlers, transportation and restaurants. A partial list of insurers in this space include AXA, Beazley, Berkley, Dual (MGA), Great American, Swiss Re, Talbot (AIG) and other London affiliates.

Many food producers are finding this insurance product affordable today as illustrated by the number of new buyers to the market during the past three to five years. Not only are premium levels stable, but policy terms and conditions also continue to expand.

The immediate assumption may be that this requires a lengthy and cumbersome underwriting process, but due to its narrow focus and specific underwriting requirements, standard product recall coverage indications can be turned around in anywhere from two weeks to 30 days, assuming the required underwriting information is complete.

Coverage can include product recall expenses such as disposal, replacement, transport, contamination coverage and pre-recall expenses. Expanded coverage can include government recalls, global coverage, business interruption, loss of profits/revenue, accidental contamination, product rehabilitation, increased cost of working following a recall, extortion demands related to malicious tampering and terrorism, as well as consultancy costs.

Other benefits may include 24/7 access to pre-incident consulting and crisis response, improvement of financial strength/balance sheet, and risk engineering services and programs. In some cases, third-party loss-of-profit coverage can also be purchased.

It’s important to identify the difference between customer loss-of-profit (CLOP) coverage and third-party recall liability (TPRL) coverage.

For starters, CLOP coverage includes profit loss sustained by the insured’s direct customer only. Meanwhile, TPRL covers loss of profit and other financial losses sustained by the insured’s direct customer as well as any other third parties, such as a customer further down the supply chain. This broader coverage includes virtually any financial loss sustained by any third party directly resulting from the recall, as opposed to only the profit loss sustained by the direct customer.

TPRL coverage can be important not only for bakery manufacturers, but in some cases, it’s also an important consideration for ingredient suppliers as well.

Unlike bakery manufacturers, whose goods are sold on store shelves, ingredient manufacturers sell their products to food manufacturers that create those finished goods or, in some cases, make baked goods that become ingredients themselves, as with items that are sold as toppings or inclusions. In those cases, a recall of one ingredient can spur recalls of multiple other products.

This phenomenon is sometimes referred to as the “multiplier effect.” The finished product manufacturer will only need to replace the retail distributor’s loss of profit, which, in most cases, is minimal due to faster mitigation. In other words, customers like grocery stores can fill shelf space quickly with alternate products if necessary. Conversely, the ingredient manufacturer may need to indemnify large financial losses sustained by multiple third parties.

According to food product recall insurance expert Rob Balogh, EVP at Amwins Group, coverage is not out of reach for food and ingredient manufacturers.

“Extremely high limits may not be required,” he said. “Generally, companies can find and solve the issues in short order to mitigate the potential loss.”

Amwins, which specializes in providing this type of coverage for retail insurance agents and brokers in the food manufacturing sector, places more than $100 million of premium in this area annually.

“Product recall insurance, especially in the food space, has been somewhat immune to the hard market and steep increases that have affected other traditional lines of coverage due to the additional capacity available,” Balogh said.

Food Safety Modernization Act regulations and protocols, good manufacturing practices, and audits that have been spurred by it have led to better food safety in commercial baking than at any other time in its history. Adding product recall coverage to those protocols and GMPs can go beyond protecting the product and provide protection to the balance sheet and the brand.

This story has been adapted from the February | Q1 2023 issue of Commercial Baking. Read the full story in the digital edition.

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