Product recall: Total recall cover

As consumers grow more demanding, and brand management becomes increasingly important, the recent horsemeat scandal has highlighted the complexities of product recall insurance in the modern age.

Following media reports that equine DNA had been found in certain ready-meal products supposedly containing beef, UK consumers began to turn their backs on well-known brands. As first quarter results show, the episode has impacted balance sheets with Tesco revealing a 1.6% decline in UK sales, stating the horsemeat scandal had a “small but discernible impact” on ready-meal sales. 

Brands that recalled their products from the supermarket shelves are likely to have financed the costs from their own coffers, as traditional insurance recall policies are typically triggered by safety issues or product defects harmful to humans.

While industry insiders believe the social media frenzy might have pushed brands to retire their products to avoid a greater PR disaster, the fact that product recall was not the correct policy also received some PR.

Kieron Russell, reputational harm and non‑damage business interruption underwriter at Kiln, says: “The horsemeat scandal was very black and white. It quickly became evident that product recall policies were not going to pay claims on contaminated products as insurers and brokers realised the event wasn’t covered. Maybe if there had been litigation, awareness would have been great but as it turned out there hasn’t been a great amount of product recall.”

Christof Bentele, chief broking officer for crisis management at Towers Watson, adds: “Things can go wrong whenever a company is producing something. Corporations are aware that food contamination can occur. This episode may have illustrated that contaminated product insurance is something very different from product liability insurance.”

Indeed, liability insurance covers a product that damages a third-party while contamination product insurance pays for first-party loss, loss of profit and recall costs.

Bentele continues: “Maybe the horsemeat scandal reiterated that one has to think about the products available and companies need to evaluate whether they need to buy these policies.”

Increased exposure
Some firms have seen a rise in interest in product recall policies. David Eynon, London market director at Manchester Underwriting, says the episode forced companies to think about their recall exposures. “We have seen a rise in enquiries from the UK, so the assumption is that there is correlation with the publicity around the scandal,” he says.

Meanwhile, Simon Plumridge, head of product recall at Zurich believes there has been a gradual increase in the sale of product recall cover over the last six to eight years following a series of recall events and the enactment of European regulation on microbiological criteria for foods – aimed at improving food safety – implemented in 2005.

He says: “Every few months there is an event that takes the limelight and companies that don’t buy the cover assess their position and think about it in more detail. There is a very strong and ongoing trend of more companies buying the product.”

Liberty International Underwriting has also reported an increase of enquiries in the wake of the scandal. Brenda Whelan, senior underwriter crisis management, says: “There have been a lot more questions around how these policies actually respond.

“In the case of the horsemeat scandal, the policy would kick in if there was any illness or injury; since there hasn’t been any proof that it is going to be harmful to humans, nor has the government ordered a recall, the only place where some cover might be available is under the adverse publicity extension. Some adverse publicity cover might still not be applicable as the main trigger for the policy was not the cause for the event.”

Pricing under pressure
In an age where the consumer’s voice is amplified through social media, it would not be out of place to suggest product recall policies should include non-harmful events in the future.

However, this suggestion has stirred controversy in the market. Bentele says there is a willingness to develop such covers but warns: “As the market stands in turmoil and lots of new players push into this insurance line, pricing is coming under pressure.

“People have suddenly started to offer all sorts of product enhancements just to keep the premiums at the same level as last year. This can potentially mean underwriters include the non-harmful recall element but this can very quickly lead to a loss in the industry.”

Bentele says this line of business has been put to the test in the past, with one underwriter designing a taste and smell cover – which would respond if a product did not taste or smell like it should.

“That insurance policy was only in existence for six months,” he says. “The underwriter realised it was a blank cheque, covering a risk that should be borne by the company itself. These are risks that should not be covered under a contamination policy and if they do then insurers might incur extreme losses.”

Whelan adds: “Supermarkets could reject a product because they don’t like the shape or colour; there would be no way to manage or control that. I don’t think there will be a change in the foreseeable future; there would have to be parameters in place.”

Cover to recall a product that may be non-harmful but defective already exists in the form of defective product insurance. The product covers recalls, loss of profit and brand rehabilitation costs, but is rarely available to food, drinks, cosmetics or other ingestible or topical products.

Plumridge says the two types of cover demonstrate product recall insurance can be confusing. “Whenever we have a high-profile event that falls outside of the scope of product recall it should be an agent for further innovation,” he says. “Underwriters should think about products we can bring to market that bring customers an alternative solution.”

Accumulation of risk
While the industry is yet to tackle this challenge, adjusting to the growing risk of longer supply chains might seem like a more achievable goal. The longer the chain, the harder it is to control the event, as regulators discovered during the horsemeat scandal when trying to identify the source of the equine DNA, which was eventually traced to Romania.

“We have to be very careful when we write different risks within the same line of business,” Russell explains. “If supermarkets all get their meat from the same supplier and those suppliers get their meat from one place, let’s say Holland, it will cause an accumulation of loss.

“We have to ensure that when we underwrite that type of risk we have a good idea of where the supply chain comes from and ensure we don’t have an accumulation of risk.”

Origin investigation
Additionally, insurers need to be aware of which part of the chain they are insuring. Enyon explains: “Sometimes, when the contamination occurs at a point along the production chain the policy might just cover the costs of identifying where that contamination occurred, which obviously includes the costs associated with the investigation to the origin. If it’s not your contamination you would then look down the chain to subrogate a loss to the party that was responsible.”

While the regulation firms are subject to as a result of outsourcing their production to other countries can be taken into account when insuring a recall of a product, insurers seem more concerned with the safety standards of the manufacturer itself.

Bentele says: “All companies have their own controls to immediately identify whether the product is defective while it is being produced. If a firm has that process incorporated then they are able to stop the problem right away, but if you don’t have a process you might end up searching until you find the problem. By that time the contaminated product is God-knows where; most likely it has already been consumed.”

The economic situation and the global nature of trade seem to be pushing companies in opposite directions as Plumridge says Zurich has noticed two trends in the market.

“First, there are clients that feel they have a strain on their budget and are unable to justify additional expense on product recall cover,” he says. “Then there are others who, in economic climate, know it is more difficult to withstand a recall event.”

Whelan describes this situation as a catch 22. While firms are looking to keep their costs down, stepping away from what they perceived to be luxury products, some are coming under pressure to embrace product recall cover.

She explains: “While the horsemeat scandal very clearly will not affect how recall policies respond, in the long run it will highlight the costs involved in a recall and how it can actually affect business. But even prior to this event, given the large costs associated with the implementation of a recall, a lot of supermarkets have included it in their contracts for suppliers to have recall cover.”

This article was published in the 13 June 2013 edition of Post magazine