IBS V.P. Bernie Steves
Why You Need Product Recall Insurance!

FoodTechSource: How long has product recall insurance been available?

Bernie Steves: Since the late 1980s. The first type of product recall insurance was called malicious product tampering, which really only responded to malicious incidents—it kind of developed out of the Tylenol tampering incident. The limits were $3 million, with six-figure premiums. That’s the way it was for a couple of years. Slowly the book of business grew which allowed us to support a larger capacity and to sell higher limits of insurance as well as to expand the coverage. Accidental contamination insurance was included into most of the forms in the early 1990s—again with a limit of initially $3 million. Now it has grown to the point where the policies are generally combined accidental contamination and malicious tampering, with coverage limits of $200 million-plus.

FTS: That’s a lot of coverage.

Steves: That’s because it’s catastrophic insurance. When we have losses they are generally major. Our clients are not concerned with the smaller losses they can handle financially in house. What they are looking for is protection from the large, catastrophic European Coca-Cola-type incident. Or the Tylenol-type incident. That’s why is was important, particularly for the larger companies, to have a capacity of $200 million. Providing $10 million in coverage for a catastrophe that could generate a quarter-billion in losses is really only scratching the surface.

FTS: What level of premiums are you talking about?

Steves: You see them go as low as $5000; seven figures for the larger companies. Deductibles, again, may be down to $5000 or $10,000, or as high as $25 million.

FTS: So, it’s financially plausible for small companies as well?

Steves: When coverage first came out, because of the price tags and the minimum deductibles required, it was accessible only to large, multinational food companies. But now almost every insurer has a strategy to go after smaller businesses.

FTS: Are the policies limited to producers and manufacturers? Or do they serve retailers as well?

Steves: The product is aimed at food & beverage, pharmaceutical, cosmetic, tobacco; anything you can put in you or on you. And it’s not only for manufacturers, but for distributors and retailer as well. But they each have a different loss scenario. A manufacturer’s initial loss may be the cost to recall the product. A retailer or distributor may also suffer that kind of loss because many have their own private labels, and most grocery stores do a lot of their own meat processing—grinding and cutting—which presents a particularly high hazard. But a retailer can suffer losses for all the products he handles even if only one gets recalled. So, the policies also cover loss of business income as well as rehabilitation and crisis management.

“The product is
aimed at food & beverage,
pharmaceutical,
cosmetic, and tobacco;
anything you can
put in you
or on you.”

FTS: When a loss does occur, how does the insurance company react? Or is most of your activity proactive, occuring before the loss?

Steves: We try to get involved before it happens. All of these policies, no matter who the insurer is, come with a consulting aspect to them. The consulting aspect is generally two-fold. One would be the crisis management side. The other would be the crisis communications or public relations side. Our proactive efforts may be when we’re looking at an application, or when we’re talking to a client and we find the client may not be quite as well prepared as we would like them to be. That is something we look at because somebody who is prepared for an incident is going to be able to minimize the loss when it happens, if not avoid the loss altogether. If they’re not prepared, we suggest they meet with the consultants we have on retainer who will assist in developing a crisis management plan, developing a proper recall plan; making sure that they have thought of all the contingencies—because generally these kinds of things inevitably happen on a Friday afternoon at five o’clock when nobody is prepared for them to happen. What does a security guard do when he gets a call from the press? Everyone from the security guard to the CEO needs to be prepared for that. There are so many examples of companies that handled an incident extremely well and others that did not. Those that did not are generally no longer in business.

FTS: You don’t want the public losing confidence in the safety of your product.

Steves: That’s where no amount of insurance can cover you, and where the real value of having the experts and the consultants who literally deal with these things on a daily basis really comes in. Most policies come with an emergency 800 number so the insured can call and ask for assistance when an incident happens. And that assistance can deal with, depending on the type of incident, the security side if we’re talking about malicious tampering or product extortion, or an accidental contamination where you may want to confer with experts who have experienced those sort of things and know the people to call to get the proper notification out to government officials, customers, the press, employees, labor unions—everybody is going to be interested.

FTS: How closely do the consultants work with the insureds?

Steves: It’s very voluntary. We make them available to the insureds. We suggest they use them; we don’t require that they use them. However, the costs, the fees and expenses of the consultants are covered under the policy. So they can go in at the client’s request and walk them through, offering advice.

FTS: Does that mean getting involved to the point of helping to develop HACCP plans?

Steves: They can go that far. Anywhere from QC up to crisis communications recalls. They can get involved in all those aspects. That’s why I think it’s an important product for smaller companies—the valued-added side where the small companies will not have the resources larger companies have. They have their own public relations firms on retainer and their own security department for when something like that happens. They deal with product safety issues constantly. The smaller ones—$100 million and $250 million and smaller—they don’t have those facilities and they don’t really know what to do. That’s why I say it’s more important for them.

“It helps smaller
companies that don’t
have the resources
larger companies have—
public relations firms on retainer
and a security department
for when a
contamination happens.”

FTS: They don’t have the buffer, either. They don’t have the luxury of being able to sit for a year and wait for the public to forget while they clean up their act.

Steves: And at that point you’ve lost your shelf space. The bigger companies have a little more pull to hold onto shelf space, and that’s one of the biggest issues of loss for a company. Once you’re off the shelf it’s very difficult to get back on.

FTS: How many smaller operations are there out there that would be likely to need insurance?

Steves: There’s thousands, certainly.

FTS: Do you see advancements like irradiation resulting in lower premiums?

Steves: It certainly should lower or limit the risk—when and if and how wide spread that becomes within the industry is the question. And that comes down to how accepting is the public going to be. Generally speaking, with the globalization of the food industry, that is going to tend to increase our risk with products being manufactured throughout the world. The fact that more and more people want less processed food as opposed to more processed food increases our exposure from a contamination standpoint.

FTS: Why?

Steves: A lot of times food that has been processed can lower exposure.

FTS: The public is also balking at genetically engineered foodstuffs. Would loss in sales be covered there?

Steves: Something like that would not trigger the policy. An insurer looks at contamination as either accidental contamination or malicious contamination. The difference between the two under an insurer’s standpoint is that under accidental contamination the product has to have resulted in, or likely will result in, bodily injury, sickness, disease or death. There is generally a manifestation period that goes along with that as in when the bodily injury would have to manifest itself. That’s not true on the malicious side, in which case it just has to be deemed unfit for use or believed by the public to be unfit for use because of an extortionist’s call or what have you. So baring that in mind, I don’t think it’s been proven that genetically modified products are dangerous to your health. It is just public perception, and given that they would not cause bodily injury between 90-125 days, which is the common period you would see on an insurance policy, there would be no recall.

FTS: So, the limitations on the policy wouldn’t apply to that?

Steves: Correct.

“The general policy
covers four separate
areas: recall expense,
crisis communications,
rehabilitation, and loss
of business income.”

FTS: What exactly does a product recall policy cover?

Steves: Generally the policy covers four separate areas; the first is recall expense—that would be the cost to inspect, withdraw, and destroy the bad product, the communications and public relations, and transportation, staff overtime, additional staff—whatever it takes to get the bad products off the shelf and good products back on the shelf. It also covers replacement costs of the product that cannot be reused. Certain products you can obviously do an inspection and if it’s not tampered with or contaminated, you put it back on the shelf. Other products—especially fresh products or dairy products would have a definite shelf life and you would have to destroy those products, so the policy would cover the replacement costs. It also covers rehabilitation expense—reestablishing your reputation and the market share of the product line that was effected. That’s basically advertising costs, coupons and such. Also, it covers loss of business income generally for a period of 12 months following an incident. Then the last aspect of coverage is for the consultants: crisis consultants, public relations consultants to assist the insured in the handling of an incident.

FTS: Is that what your policy offers?

Steves: Yes. However, we also offer a “crisis link plus” feature that is targeted at the small and medium-sized firms. This is the consultant aspect: Our consultants are available more proactively than most of our competitors’ in that when we write an insurance policy we provide the insured with a crisis management plan free of charge. Generally, consultants are going to want to charge $10,000-$25,000 to develop such a plan. Ours is free. And we emphasize crisis communication and public relations. We have two consultants retained: Corporate Response Group out of Washington, D.C., that helps coordinate the overall crisis management, and Edelman Public Relations, which is one of the nation’s largest and literally deals with these types of situations on a daily basis.

FTS: How does recall insurance help protect the public?

Steves: I think really from the crisis aspect of things in a preparedness aspect. Generally speaking, we are not going to want to insure someone who is ill-prepared. That’s not the idea of this insurance. Nobody wants to have a loss. Having this type of insurance raises the overall awareness of the issue of food safety, brand equity and what an incident can do to your brand and to your company. And, of course, it ensures that a company gets the word out to the public when a recall does occur.

FTS: Are there companies you won’t insure?

Steves: Definitely: companies that have repeated recalls or that are ill-prepared. Like I said, nobody wants to have a loss.