How to mitigate the risk of product recalls

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How to mitigate the risk of product recalls

16 Jun 2025

Commercial Baking Staff

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Contact Freddie Schlesinger, senior VP, Crisis Management & Product Recall, at freddie.schlesinger@lockton.com, or Ryan Brennan, AVP, Producer, at ryan.brennan@lockton.com.

KANSAS CITY, MO — In early February, the FDA upgraded to Class II the voluntary recall of approximately 2 million baked goods produced by FGF Brands. The designation applies to products that could cause “temporary or medically reversible adverse health consequences” or that have a remote possibility of leading to “serious adverse health consequences.” The cause of the recall was potential contamination from Listeria monocytogenes, a type of disease-causing bacteria.

This is not the only recall to hit the baked goods sector in recent months. In January, a Class I recall, which means there is “reasonable probability that the use of or exposure to … will cause serious adverse health consequences or death,” was issued for NuGo chocolate products that were labeled vegan but contained milk after the company received 11 reports from consumers about an allergic reaction. In December 2024, Compass Minerals America Inc., a leading producer of essential minerals, recalled a variety of salt products due to the potential presence of metal fragments. For bakery manufacturers and retailers, the source of a recall event could be anything from allergen cross-contaminations and mislabeling to a supplier-provided contaminated ingredient.

Worsening macroeconomic climate and inflationary pressures have squeezed profit margins for firms across the global food and beverage supply chain. As businesses accelerate their operations to maximize turnover, this may come at the expense of quality assurance. This argument is reflected in sector-wide data: According to Sedgewick, US recalls totaled 580.43 million units in the first three quarters of 2024, the highest on record. Tighter regulatory scrutiny, coupled with improved technology to detect issues, and the growth of social media, has also driven an increase in recall frequency.

Mitigating the impacts

The impact of a recall event can be devastating. According to an analysis of FDA data, labeling issues alone cost the US food industry an estimated $1.92 billion in 2024. Notwithstanding the primary costs of recall and destruction of unwanted products, mislabeled or contaminated items pose clear bodily injury risk to consumers. Businesses may have lawsuits brought against them and, if found to have been negligent, may be required to pay significant compensation. Recalls may also spike consumer and corporate sentiment, depressing income.

Despite companies taking action to mitigate risk, product recalls cannot be ruled out entirely. If one occurs, businesses need to be confident in their ability to withstand the costs, making product recall insurance a valuable protection tool.

Determining liability for a recall depends on the nature of its origin. Errors may be more likely to occur when tasks such as labeling and packaging are outsourced to a third party, owing to the associated lack of oversight. However, this doesn’t mean all such operations should automatically be brought in-house, as increased control can also mean increased liability. Even if a business isn’t liable for a recall itself, it may still feel the financial and reputational impacts, particularly when a supplier isn’t able to recoup the losses.

There is no single solution for preventing contamination events. Instead, businesses should keep abreast of any relevant changes to FDA legislation and take actions to minimize the likelihood of contamination. Key considerations for businesses may include:

Customer and supplier arrangements

Businesses should consider whether they are overly reliant on a single customer or supplier and whether the cancellation of a key contract due to a recall would threaten operations. In the case of suppliers, over-reliance can be equally problematic. Contracts should be assessed on a regular basis, taking into account financial health, transparency, certificates of analysis, and quarantine procedures for supplied ingredients. Processes should also be in place for suppliers to notify their customers of any raw ingredient or product substitutions and the implications for labeling and packaging.

Internal quality assurance

A simple labeling and packaging review process will help identify errors prior to production, minimizing costs and reducing the risk of regulatory non-compliance. This should include a robust sign-off procedure. To reduce machine error, equipment should be monitored, inspected on a regular basis and proactively serviced. Managerial oversight is key to combat human error. Staff should be trained to identify potential sources of error and prevent their reoccurrence. Periodic mock simulations and training exercises can ensure staff are well-versed in the potential implications of a recall and help limit the impact of such events if they occur. Businesses may also address potential sources of burnout or overwork, which typically increase the frequency of errors.

Product recall insurance

This complements risk mitigation by providing coverage for the financial impact of a recall, including costs associated with identifying and addressing the issue, undertaking the recall itself and preserving business continuity. It is especially valuable when businesses cannot guarantee reimbursement from a supplier or contract manufacturer. Businesses that purchase product recall insurance may also receive up to 5% of the premium to invest in pre-incident risk management. For smaller businesses, this can make risk mitigation more affordable.

Historically, the market for product recall insurance has been restricted to bodily injury-related issues arising from manufacturing errors. The burden of proof has rested with the insured to provide evidence the product would cause bodily harm if consumed.

Fortunately, an influx of insurer capacity into the market has boosted competition. This has led to lower premium rates, larger insurance programs and broader coverage. As a result, food and beverage businesses may now be able to secure coverage for elements of quality coverage. One key example of this has been the introduction of a mold, pest and rancidity endorsement, applicable in cases where there is no clear evidence that bodily injury would occur.

Despite companies taking action to mitigate risk, product recalls cannot be ruled out entirely. If one occurs, businesses need to be confident in their ability to withstand the costs, making product recall insurance a valuable protection tool.

This story has been adapted from the April | Q2 2025 issue of Commercial Baking. Read the digital edition here.

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