Food and Production Contamination Insurance

Product Contamination Insurance – Risks and Liabilities

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Product Contamination Insurance offers a much broader range of cover than classic recall insurance and provides cover for a catalogue of costs.

Companies operating in the food industry can face many problems leading to significant losses due to incidents of product contamination. The topic is important, particularly for those businesses that operate outside their local market.

Exporters need additional organisational and financial support when reacting quickly to a real or potential threat to property or the life or health of consumers in various parts of the world caused by their product.
According to several studies, as many as 58% of companies have been affected by events involving food recalls.

The risk of a product recall is always present

The product recall insurance offer is designed for any client who places food on the commercial market, including both unprocessed products (e.g. meat or seafood) and highly processed finished products (e.g. cold cuts pasta, confectionery, beverages).

Due to the nature of the products sold and their storage requirements, great care should be taken by those who distribute, for example, fruit and vegetables. These products are sensitive to storage conditions. Improper storage of eggs and dairy products can even lead to health problems and illnesses for consumers. It is also crucial for manufacturers who use nuts, grains or spices in their plants to be mindful of the risks associated with possible contamination of their product by these allergenic agents.

Product withdrawal from the market can happen for multiple reasons. It could be microbiological contamination, i.e. contamination of the product with bacteria; it could also be physical or chemical contamination. Mislabeling, use of unapproved ingredients, or even failure to observe the proportions between individual ingredients may cause the claim and the need to recall the product. These circumstances lead to the product being considered non-compliant or even dangerous for consumers and a recall for the entire batches of finished products.

One example is a German company with a turnover of EUR 100 million that had to incur additional recall costs in the US and UK after listeria bacteria was found in its meat products. In the end, the loss amounted to EUR 90 million.

A bottle manufacturer from Poland received a $10 million claim related to having to recall several million bottles of beer. Only three bottles had cracks, but all of the bottles placed on the market were recalled for customer safety reasons. Insurance covered the loss.

What are the reasons for liability?

Liability reasons can be multiple. Accidental contamination means ingestion of the insured product has led or may lead to bodily harm. Examples of contamination include listeria, E. coli, salmonella or foreign bodies (e.g. plastic/metal in the product).

Malicious product contamination is the actual or likely deliberate alteration/contamination of a product. Often it is done by disgruntled employees who have access to the facility or product.

Product-related extortion happens when a person or group threatens to extort money by deliberately tampering with a product, e.g. contaminating it. Government withdrawal represents a forced or ordered withdrawal by a government or regulatory body. It often includes suspension of operations and applies whether or not contamination is present. Finally, adverse publicity is any reduction in sales caused by alleged, but not actual, contamination.

What can you expect with Product Contamination Insurance?

Product Contamination Insurance offers a much broader range of cover than classic recall insurance and provides cover for a catalogue of costs:

  • Recall replacement costs (including product value), damage-owned and third party costs and expenses.
  • Interruption of the insured’s business and loss of profit – inter alia if the facility is closed due to contamination and needs professional services to survey and disinfect the facility. Even one day of downtime generates a loss, and prolonging it increases costs.
  • Increased labour costs – the cost of staff working overtime or employing extra people to clean up the contamination/recall or disinfect the plant.
  • Reputation restoration costs refer to the cost of bringing the brand back to its pre-recall condition. Includes sales and marketing costs, like giving a discount on your next product purchase or promotion where if you buy one product and get another one for free.
  • Product recall liability damages are any damages that the insured is legally obliged to pay to its customer in the event of contamination. Damages may include loss of client profits, rehabilitation expenses or reimbursement of purchase costs.
  • Consultant costs refer to the expenses of expert consultants who will guide the insured through the crisis. A pre-incident fund is also available in the policies, and it may include reviewing crisis management plans and providing food safety training.

This article is a part of our Foodprint publication focusing on issues and risks facing the Food & Agriculture industry. Read the publication and learn more about insurance solutions and the growing importance of risk management and alternative solutions like parametric insurance.

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Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60