Product
Recall
The Developing Story
A Catlin Group Limited Report
Contents
Introduction
01
A Threat to Business Reputation
02
Trends
04
Globalisation
06
Regulatory Complexity
08
Consumer Power
10
Managing the Risk 11
Counting the Costs
12
Some Notable Recalls
16
Insuring the Risk
18
Sources of Information & Advice
20
Catlin Crisis Management 21
Catlin Group Limited is an international specialist property/casualty insurer and
reinsurer writing more than 30 classes of business worldwide through six underwriting
hubs. Gross premiums written in 2011 amounted to more than US$4.5 billion.
Catlin’s operating hubs are located in London/UK, Bermuda, the United States, the
Asia-Pacific Region, Europe and Canada. These hubs allow Catlin to work more closely
with policyholders and their brokers and provide Catlin with expanded product and
geographic diversity. Altogether, Catlin operates more than 55 offices in 21 countries.
More information about Catlin’s Crisis Management underwriting team can be found on
page 21.
April 2012
Catlin Group Limited
Introduction
For manufacturers today, brand name has become paramount.
Perception by customers goes hand in hand with a product’s
success or failure.
This rings true for a multinational with revenues
of US$10 billion a year or for a second
generation, family-owned business with sales
1,000 times less.
Unfortunately, there are many ways a company’s
brand can easily become damaged.
David Burke
Catlin Crisis Management
London
Product quality and safety are the shop window
of a brand. Internal manufacturing errors,
serious design faults or malicious tampering
mean that, instead of highlighting the strength of
the company’s products to customers, the exact
opposite can occur. The consequences to a
manufacturer’s profits and balance sheet can be
severe, even fatal.
The risk landscape is constantly changing
with, for example, the benefits of social media
in marketing products having a dangerous flip
side when things go wrong. Consumer safety is
growing in importance to governments around
the world, so that the overall number of product
recalls moves only in one direction: higher.
However, the insurance industry in recent years
has recognised that it can help its clients with a
combination of expert consulting advice, both
on a pre- and post-loss basis, and flexible
coverage that offers revenue and financial
balance sheet protection. This means that a
product recall can become a manageable
problem rather than a potentially devastating
crisis.
I hope you find this report interesting and
valuable. For more information, contact us at
CrisisManagement@Catlin.com.
Product Recall: The Developing Story
1
A Threat to Business Reputation
Experience over more than 20 years clearly shows that a major
product recall can damage a company’s reputation, sometimes
beyond repair.
A well-managed recall can have the opposite
effect, although the costs involved to manage
the incident and restore the standing of the
business will be high.
International trends suggest continuing high
levels of product recalls of all types. New
laws are giving governments in many parts of
the world more power to intervene and order
product recalls and withdrawals. Regulation,
however, is not harmonised, and rules can be
complicated even within countries.
Supply and distribution chain visibility are
essential to managing product safety and may
ultimately reduce the likelihood of major recalls.
At the same time, however, globalisation has
added complexity to supply chains and the
management of product quality. Pressure to
bring new products to market quickly means
that there is less time to identify flaws and faults.
Only a relatively small number of food,
pharmaceutical and global consumer goods
businesses are faced with recall exposures that
can cost hundreds of millions of dollars, but
many companies significantly underestimate
the financial impact that the withdrawal or recall
of one of their products could produce. Business
interruption, in particular, can create a material
loss of revenue.
Product liability insurance is not a substitute
for product recall coverage. Product liability
insurance only comes into play if the product
has entered the supply chain and causes
physical damage or bodily injury. Various
extensions are available to this coverage, but
they only cover direct recall expenses. Product
recall insurance protects the company’s
revenue, balance sheet and contracts with
customers, and therefore provides support to
the company’s reputation and its brand.
The internet, cell phones and social media have
made it easier and much faster for consumers to
discover flaws or problems with products and to
spread their grievances.
2
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The Cost
Only a relatively small number of food,
pharmaceutical and global consumer goods
businesses are faced with recall exposures that
can cost hundreds of millions of dollars, but
many companies significantly underestimate
the financial impact that the recall of one of their
products could produce.
Product Recall: The Developing Story
3
Trends
Heightened awareness by regulators and consumers has resulted
in an increase in the number of product recalls.
The number of product recalls is increasing
internationally for many reasons. These include:
more demanding consumers; higher safety
standards and enhanced testing capabilities
which can identify even traces of unpermitted
substances; almost instantaneous
communication; a rush to market popular
products; and longer, more complex supply
chains.
If quality improvements have stabilised the level
of recalls for some products in some markets,
recalls continue to rise in other countries and
other sectors. Regulatory agencies in the
United States do not publish consolidated recall
statistics, but extensive investigation by GBI
Research found that warning letters to
pharmaceutical companies from the US Food
and Drug Administration (FDA) increased from
117 in 2007 to 523 in 2010 as a result of
manufacturing errors and regulatory noncompliance.
The number of full recalls also rose in 2010,
compared with the three previous years. GBI
found that the major therapy area with the
highest number of reported drug product recalls
was lifestyle disorders, mainly sexual.
In Europe, the number of measures taken
against dangerous products and reported by
member states through the Rapid Alert System
for Non-Food Products (RAPEX) has risen
steadily since 2003. In 2010, there was a further
increase of 13 per cent compared with the
previous year. Of these, the national agencies
considered that 1,963 of the 2,244 products
reported presented serious risk to consumers.
4
EU dangerous product notifications
2,500
2,000
1,500
1,000
500
0
2003 2004 2005 2006 2007 2008 2009 2010
n
Serious risk notifications n
All notifications
Source: Rapid Alert System for Non-Food Products
RAPEX regards the constant growth in the
number of notifications as a positive sign. More
notifications, it says, result from increased
awareness and attention given to product safety
by authorities and companies, the greater
number of market surveillance actions carried
out jointly by several national authorities, and
training and information sharing.
Two projects were, in particular, responsible for
the significant increase in the number of reports
on clothing, textiles and fashion items, which
produced 32 per cent of the total. One was the
launch of a joint surveillance action by nine
countries regarding cords and drawstrings in
children’s clothing. The second involved greater
monitoring of the presence of a strong
anti-mould compound especially in shoes,
textiles and furniture.
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There are variations to the overall trend. The
most significant of these is the gradual
reduction, from a peak in 2007, of the number
of non-food/drug recalls in the United States as
reported by the Consumer Product Safety
Commission (CPSC) and recalls of child car
seats announced by the National Highway
Traffic Safety Administration, according to
detailed research by WeMakeItSafer.
In Australia, there were more than 10,000
product recalls between 1986 and 2009,
according to a review of the country’s product
safety law by the then-Australian Competition &
Consumer Commission. The number per year
rose from fewer than 100 in 1986 to current
levels of approximately 800, with a peak in 2007
as a result of one large recall of nonprescription drugs.
In the United Kingdom, a 40 per cent decrease
in food recalls in the 12 months ended October
2009 reduced the overall number of recalls
during that period by 10 per cent to 205,
according to the law firm RPC. Each of the
following two years, however, saw recordbreaking rises, with 291 recalls in the 12 months
ended October 2011.
The products most likely to be subject to recall
do, however, vary across markets and over time,
often because of the introduction of specific new
regulations.
Sprouting confusion
German officials originally blamed Spanish
cucumbers as the source of E coli
contamination that killed 30 people and
made some 3,000 ill in May and June 2011.
This produced an angry response from major
vegetable producers in Spain, Italy and
France, who demanded compensation for
losses suffered as a result. Germany’s
national disease control center, the Robert
Koch Institute, eventually determined that locally grown vegetable sprouts were the cause
of the outbreak.
Product Recall: The Developing Story
The Australian recall data showed that
therapeutic goods such as medicines and
medical equipment accounted for 46.4 per cent
of all recalls. Consumer products generally
made up 25 per cent of all recalls. Twenty-five
per cent of these were toys, closely followed by
electrical equipment and household goods.
Motor vehicles were responsible for 19 per cent
of all recalls. Food products were significantly
less commonly recalled at only 9 per cent.
In Europe, the consumer goods with the
greatest number of notifications in 2010 after
clothing, textiles and fashion items were toys
(25 per cent), motor vehicles (9 per cent),
electrical appliances (8 per cent) and child care
articles and children’s equipment (4 per cent).
Injuries, chemical risks and strangulation were
the most commonly notified risks.
5
Globalization
Increased imports of component parts and raw materials can
create problems in ensuring product safety.
Complex products and extended, cross-border
supply chains are difficult to monitor. Several
suppliers may provide raw materials or
component parts for one product. Equally, a
single supplier may be providing a component
or ingredient to many manufacturers.
The diagram on page 7 illustrates the
complexity of the supply and distribution
network of a major food company. In addition,
at the start of the supply chain, there will be
multiple food producers.
According to the World Trade Organization
(WTO), world food exports are now worth more
than US$1 trillion annually; the value of exported
manufactured goods is only slightly less. In 2010
alone, there was an 18 per cent increase in the
export volume of manufactured goods and a
7 per cent rise in agricultural exports.
For example, in 2010:
•
•
•
•
•
•
Indonesia increased its exports of agricultural
products by 42 per cent;
Imports of automotive products into the United States increased 46 per cent;
China became the world’s largest exporter of office and telecoms equipment;
Eighty per cent of the world’s clothing
exports went to developed countries;
Japanese shipments of automotive products to China rose by 51 per cent;
Brazil was the world’s third largest exporter of food. Its major export destination is Asia.
A truly worldwide recall
Many of the world’s leading computer
manufacturers – including Dell, Apple,
Matsushita (Panasonic), Toshiba, IBM/Lenovo,
Hitachi, Fijitsu and Sharp – recalled Sony
batteries from their laptop computers in 2006
after reports that the batteries could overheat
and catch fire. Nearly 10 million batteries
were recalled worldwide.
During 2011, the financial slowdown reduced
the rate of growth, but the momentum toward
ever greater international trade continued. Trade
by developing nations is thought to have grown
by approximately 9.5 per cent during 2011,
while trade by developed nations rose by
4.5 per cent.
Regulators can only act effectively if both the
country of origin and the brand are known.
This was the case for only 84 per cent of the
products notified to RAPEX in 2010. RAPEX
notes that there is still room for improvement in
educating manufacturers and importers on the
importance of traceability in the supply chain.
“The nature of today’s food supply chain
means contamination can turn up in more
products more quickly than in the past,
causing outbreaks that affect large
numbers of people.”
PricewaterhouseCoopers, Points of View,
January 2011
6
Catlin Group Limited
Illustration of supply and distribution network of a major food company
F
F
M
F
F
F
M
F
F
F
M
F
F
M
M
W
F
M
M
M
W
R
W
W
M
F
F
M
W
W
C
W
R
M
W
C
C
W
M
C
W
W
W
Major food company W Wholesalers
Component suppliers R
Retailers
F
Food outlets (restaurants, hospitals, etc.)
M Food manufacturers This diagram is derived from the CasCat® model of a food manufacturer. CasCat® is a model developed by Guy Carpenter &
Company LLC and Atrium Risk Architecture.
Product Recall: The Developing Story
7
Regulatory Complexity
The regulation of product safety is complicated and diverse,
across and within jurisdictions. What is permitted in one country
may be illegal in another.
Regulations regarding product safety change
frequently, almost always becoming stricter.
As businesses expand into new territories, the
compliance load grows and the complexity of
any product recall multiplies.
Each country has established its own bodies
for dealing with product safety, usually several
of them. In the United States, for example, six
federal agencies with vastly different
jurisdictions regulate unsafe, hazardous or
defective products. Of these, the FDA is
responsible for food, drugs, cosmetics, animal
health, biologics and medical devices.
However, this does not tell the whole story. The
FDA covers food products, but only if they
contain less than 2 per cent meat. Otherwise,
the authority is the US Department of
Agriculture’s Food Safety and Inspection Service
(FSIS). Individual states can impose additional
product safety requirements, such as California’s
requirements for cosmetic products intended for
use in the state.
The European Union’s 2001 General Product
Safety Directive, enacted in member states, lays
down various guidelines, including those related
to notifications and recalls. Although there is an
EU-wide regulatory regime, there are some
differences in national legislation.
Each European Union member country has its
own product safety organisations. In the United
Kingdom, for example, there is the Food
Standards Agency and the Medicines and
Healthcare Products Regulatory Agency.
Environmental health and trading standards
officials, who work within local government, are
responsible for most consumer products.
8
At the EU level, two organisations collect and
coordinate actions by individual member
nations: RAPEX for consumer goods and RASFF
for food. The European Medicines Agency is
responsible for the scientific evaluation of
applications for European marketing
authorisations for human and veterinary
medicines. REACH deals with the registration,
evaluation, authorisation and restriction of
chemicals. A five year review of REACH,
including breaches and enforcement actions,
is under way and due to finish in June 2012.
Australia’s new Consumer Law went into effect
on January 1, 2011 and includes a new, national
product safety law and enforcement system
with a unitary authority. Under the law, every
Australian business has the same rights and
responsibilities, instead of previously separate
provisions under 20 national, state and territory
consumer laws.
International cooperation
Raw materials, components and finished
products are traded around the world in
enormous volumes, so regulators are
increasingly sharing technical information about
product safety issues.
The 2011 US Food Safety Modernization Act
calls for stronger collaboration among all food
safety agencies, including those in other
nations. The FDA already has inspectors in
China and India, which are the largest sources
of pharmaceuticals imported into the United
States. The agency has overseas posts in three
Chinese cities and two in India, as well as in
Costa Rica, Mexico, Chile, Belgium, the United
Kingdom and Italy. In 2011, it opened posts in
Jordan and South Africa.
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There is close cooperation on consumer product
safety between the CPSC and the European
Commission which involves a regular information
exchange regarding regulatory frameworks,
emerging risks and dangerous products. For
example, they have established a working
group on the safety of toys and other children’s
products.
Chinese-made goods are the single largest
source of recalls in Europe, accounting for
58 per cent of all recalls during 2010. This is
partly due to the very high volume of products
imported from China. The RAPEX-CHINA
system, established in 2006, provides real
time information to the Chinese authorities on
all products of Chinese origin notified through
RAPEX. In return, the Chinese provide quarterly
reports to the European Commission of
enforcement actions carried out in response.
RAPEX says that constantly improving
cooperation with the Chinese authorities is
yielding positive results in terms of improved
traceability and thus more scope for remedial
measures.
New laws
New laws are increasing the rights of
consumers, in developing as well as developed
markets, and are strengthening the authority of
safety agencies. 2011 saw widespread changes
to consumer protection legislation. Countries
from the United States to India and Australia
implemented important product safety laws.
Product Recall: The Developing Story
The US Food Safety Modernization Act is “the
most sweeping reform of our food safety laws
in more than 70 years,” according to the FDA.
It affects growers, food processors and
manufacturers, retailers and food service
businesses, and importers.
Thanks to the new law, the FDA has more
powerful enforcement tools, including
mandatory recall authority, to ensure that
companies processing food adequately manage
the risks of contamination. The law also gives
the FDA improved ability to oversee the 15 per
cent of US foods that are imported, including
inspections of foreign facilities. Importers will be
responsible for verifying that their overseas
suppliers have risk-based preventive controls
and for monitoring records of shipments.
Around the world, pressure grows on politicians
to improve consumer protection as incomes and
purchasing power rises. For example, in August
2011, India brought its food safety regulation up
to date by implementing fully the Food Safety
and Standards Act, 2006. The law brings
together eight prior food laws, consolidating
them into a single set of rules and regulations
under a single regulator: the Food Safety and
Standards Authority of India.
9
Consumer Power
The ability of consumers to access information about potential
problems with a product is developing rapidly thanks to the
internet, mobile phone applications and social media.
The easy dissemination of information today
allows customers to check whether they need
to return a product which is defective. This
can help manufacturers, but it also can draw
additional attention to the names of commonly
recalled brands and products.
In the United States, the six federal agencies
which regulate unsafe, hazardous or defective
products joined together in 2011 to create a
one-stop shop for US government recalls:
www.recalls.gov. Consumers also have hotlines
and internet sites for easy reporting of defective
products, such as www.saferproducts.gov.
Australia created a similar system in its
sweeping reform in 2011 of consumer protection
legislation. Members of the public can find
information, including the latest product safety
news, and report any concerns about unsafe
products through www.productsafety.gov.au.
Details of recalls can be found at
www.recalls.gov.au.
Such arrangements are spreading. In March
2012, the Caribbean Community (CARICOM)
began an online service which allows
consumers in the 14 member nations to report
safety concerns about non-food products.
Social media
Consumers have for some years used the
internet to put pressure on suppliers and
manufacturers to recall and repair defects.
When in 2005 Mercedes drivers expressed
concern that the company was not taking their
complaints seriously enough, they resorted to an
internet-based protest campaign. The company
ended up recalling 1.3 million vehicles, the
largest-ever automobile recall at the time.
10
Social media has accelerated the
communication of consumer complaints to an
unprecedented extent, particularly through
Twitter and YouTube, where disgruntled
customers have posted videos of their
complaints. These social media websites allow
concerned consumers, such as parents of small
children, to quickly form a collective voice about
an issue in a way that would have taken much
more time in the past. Misinformation can also
spread rapidly.
Battery recall logistics
India is one of Nokia’s largest markets.
Corporate headquarters sent what it
considered was a routine product advisory
for a defective battery, but wide publicity in
the national media resulted in anxiety among
customers about the potential dangers
involved, according to a Harvard Business
School case study. As a result Nokia was
forced to replace a substantial number of
batteries over a three-month period.
Some lay people, dubbed ‘citizen enforcers’,
are performing their own product testing and
publishing the results on the Internet. According
to the American Bar Association, for example,
the portability and simplicity of today’s x-ray
fluorescence analysers has enabled citizen
enforcers to check consumer products quickly
and easily for lead, cadmium, and chromium
contamination. They then publish the results
through social media.
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Managing the Risk
A delayed or mishandled product recall can cost a company
dearly, so a pre-determined and tested crisis management plan
is essential.
Consumer protection laws in developed
countries require companies producing goods
for the general public to have established
processes for deciding when to notify suspected
product defects to the appropriate regulator,
when to recall the product and how to do it.
A multinational business with many consumer
product lines is likely to have experience with
recalls, if only from what Unilever once called
‘an abundance of caution’. Cases going back
more than 20 years have shown how a delayed
or mishandled recall can damage the reputation
of a business, sometimes irreparably. Smaller
businesses, especially those further back in
the supply chain, are unlikely to have the same
experience. The advice of expert consultants
is invaluable, both to reduce the risks and deal
with any problems that do occur.
Many of the steps involved in a recall are
over-lapping and vary in urgency according
to the severity of the threat or breach of
regulations involved. Because of stringent
reporting requirements, companies are
frequently obliged to report the product safety
issue and decide on a course of action before
they have a clear view of the nature and extent
of the problem.
“Society has become more used to recalls
and the impact on brand damage is
reduced if they believe that responsible
steps have been taken. On the other hand,
delaying a recall can be both expensive
and damaging to a business’s reputation.”
Jason Bright, RPC
Product Recall: The Developing Story
“You can’t tell if pathogens are in your food
because you cannot see, taste or smell
them.”
Carol Kozlowski, RQA
These are the main actions that should follow the
discovery of a defect:
• Put the company’s planned – and tested – recall programme into effect.
• Contact crisis consultants. Consultants
working with product recall insurers will guide the business through the decision making, and if necessary, recall process.
• Use the crisis consultants’ advice, including
but not limited to product testing and
corresponding with regulatory bodies.
Identify the severity of the risk.
• Send a positive PR message to customers.
• Avoid unnecessary contact with external
parties.
• Notify distributors and retailers as quickly as possible.
• Tell the broker or insurer that there are
circumstances that could give rise to a claim.
• Identify affected batches or shipments.
• Rectify the problem. The measures needed may be as simple as withdrawing a batch from the warehouse and relabeling it or as complex as a full recall with international publicity, the destruction of defective
products and a comprehensive cleansing of an entire plant.
• Restore the reputation of the product, the company and the brand.
Time is of the essence when a problem is
discovered. Delay is likely to exacerbate costs
and liabilities.
11
Counting the Costs
A recall of a major product can cost a manufacturer hundreds of
millions, even billions, of dollars.
In its report on US drug warning letters and
recalls, GBI Research says that the increasing
number of product withdrawals and recalls are
causing pharmaceutical companies a significant
loss of revenue. There, however, are no
definitive figures for the cost of product recalls
and withdrawals, only disclosed provisions
from individual companies. These can run into
hundreds of millions of dollars or even billions of
dollars.
Johnson & Johnson, long admired for its
handling of the 1982 Tylenol tampering case,
reported US$900 million in lost revenue from
recalls of drugs, contact lenses and hip
replacements and a lengthy shutdown of one of
the factories involved during 2010.
These are extreme cases, however, involving
global companies and very high-profile
incidents. For other businesses, the amounts
involved are likely to be in the order of millions or
tens of millions of dollars, although the potential
is higher.
“Having access to consultants does not
mean the company abdicates responsibility
for managing a product safety issue, but it
does release management time from being
pre-occupied with an incident that may
affect only a small part of the operation.”
David Burke, Catlin
12
Breakdown of product recall claims*
6%
10%
35%
49%
n Recall costs n Business interruption
n Product rehabilitation costs n Extra expenses, pre-recall, etc.
* Does not include consultancy costs paid by insurer
Source: Catlin
All these figures are correlated. For example,
spending on brand rehabilitation generally
reduces the impact of the incident on the
company’s continuing business and so reduces
the business interruption element.
The financial breakdown for each claim can
vary, but what does not change is the potential
of a recall to decimate the company’s profits and
balance sheet. Companies need to analyse their
potential maximum and most probable losses
and how much exposure they want to carry on
their own balance sheet. It comes down to risk
appetite, and many companies significantly
underestimate the potential costs of a recall,
particularly the business interruption aspect.
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How consultants help mitigate product safety recalls
Pre loss
• Supplier audits
• Audits of client systems: hazard analysis and critical control points (HACCP), best management practice, etc.
• Site security reviews
• Recall and crisis management plans testing
Once an incident occurs
• Retrieval and testing of products
• Source identification
• Advice on dealing with regulatory authorities
If a recall is required
• Recall assistance, including product repair or destruction
• Crisis public relations
• Brand restoration advice
Post-recall
• Assessment and effectiveness checks
• Lessons learned
Major direct costs include:
• Logistics. Tracing and returning the defective products.
• Repair or destruction and replacement. Costs can mount, exponentially, if many
territories are involved.
• Third-party expenses, for example for
retailers who have to remove the affected products from their shelves and lose
business.
• Laboratory and other investigation costs.
• Legal and other professional advice.
• Business interruption. If a plant or production
line must be closed for weeks or even months while the problem is corrected, the loss of revenue can be the largest single
element of the cost.
• Cleansing of contaminated premises or
redesign and re-engineering.
Product Recall: The Developing Story
•
•
Extra expenses during the recall, such as temporary staff and consumer help lines.
Brand restoration and rehabilitation.
Advertising and other promotional costs can
be high, depending on the severity of the problem and extent of distribution.
“With the ever more onerous contractual
demands placed on them by the major
retailers and the near instant backlash of
social media if things go wrong, many food
and beverage companies are simply not
ready for the demands on their time and
resources in the event of a crisis. They
really do need to step up the planning and
preparation if they are to survive such an
event.”
Rupert Reid, Security Exchange
13
Counting the Costs
continued
Indirect costs
Indirect costs, which may not be so obvious, can
continue to impact a company’s performance for
years following a problem with a product:
•
•
•
•
•
•
Competitors can grab market share while the product is off the market.
Opportunities are lost while senior
management is pre-occupied with the recall.
The product may become obsolete,
especially in fast-moving industries like
electronics and high fashion.
Distributors may give less favourable terms or refuse to renew contracts.
A highly visible recall can shake confidence in the brand as a whole, reducing sales of unaffected products.
Long-term damage to the company’s
reputation can increase its cost of borrowing
and impair its ability to attract and retain quality staff. The company can become a takeover target.
The number of recalls and the standing of
the businesses involved in recalls worldwide
demonstrate that no company can completely
eradicate the possibility of a product safety
issue. They can, however, reduce the potential
impact:
• Businesses need a robust system for
monitoring customer complaints, including through social media.
• Small, relatively cheap measures, such as reducing batch quantities and keeping back samples from each batch, can reduce recall costs.
• Systems that track components or raw materials through the supply chain can help to pinpoint the source of defects.
14
•
•
•
Consultants can help companies make
pre-loss risk improvements, manage the multiple steps of a recall and deal with post-
loss issues like communications.
Good communication between suppliers and retailers regarding product and
packaging changes can reduce the risk of unpleasant surprises.
A robust and practised crisis management plan and management team are an essential and often a regulatory obligation.
Contractual arrangements that allow retailers
to reclaim their costs from suppliers or
manufacturers are common. In practice, shifting
the risk to a financially weaker partner does not
necessarily reduce the exposure if the supplier
does not have adequate resources.
Small company, massive recall
Salmonella contamination traced to peanut
products sold by a private company with
US$25 million in sales resulted in an FDA
recall of 3,913 products from at least 361
companies in 2008 and 2009. It was one of
the most extensive food recalls in US history.
The supplier, Peanut Corporation of America,
was forced out of business in the face of
multiple lawsuits. Operating from plants in
Georgia, Virginia and Texas, it supplied
peanuts, peanut butter, meal, and paste to
institutional users such as schools and
nursing homes, food processors, and retail
outlets. The company manufactured roughly
2.5 per cent of US processed peanuts.
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A Global Exposure
The number of recalls and the standing of the
businesses involved in recalls worldwide
demonstrate that no company can completely
eradicate the possibility of a product safety
issue.
Product Recall: The Developing Story
15
Notable Recalls
While some recalls are modest, others are global in scale and
can have a significant impact on a manufacturer and its brand
reputation.
While there has been thousands of product
recalls over the past decade, some have made
headlines worldwide due to the size of the
recalls and the impact they have had on
manufacturers.
Toys worldwide
Mattel, the world’s largest toymaker, recalled
approximately 21 million Chinese-made toys
worldwide over five weeks in 2007, including
its iconic Barbie dolls, because of lead paint
contamination and tiny but powerful magnet
hazards in some toy figures.
One reason for the presence of the lead paint,
Mattel explained, was that a sub-contractor in
China had violated Mattel’s standards and used
paint from an unauthorised third-party supplier.
The company announced an immediate
strengthening of its control systems and
procedures. Its third-quarter 2007 results
included incremental costs of approximately
US$40 million related to the product recalls.
“Mattel also pledged to significantly
increase the frequency of its paint
inspections, testing every batch delivered
to every vendor, in order to prevent lead
paint from being used in its toys. And it
sought to assure Wall Street that its new
quality-control regime won’t adversely
affect holiday sales.”
Not mother’s milk
China’s dairy industry suffered a major blow in
2008 when it was discovered that the organic
compound melamine, which causes liver
damage, had been illegally added to milk to
improve its tested protein content. It was an
enormous scandal in China and impacted
foreign companies which had bought milk
products from China.
The Chinese state news agency reported in July
2010 that food safety officials had seized further
dairy materials contaminated with melamine,
with the implication that traders were reselling
tainted milk that should have been destroyed in
2008.
Cars – a blow to the reputation
There is no official figure for the total costs
associated with the largest-ever motor vehicle
recall, an estimated 14 million vehicles by the
world’s largest car manufacturer Toyota Motor.
However, the recall certainly cost billions of
dollars.
Starting in November 2008, Toyota ordered
several recalls over a period of 18 months
following claims that unintended acceleration
had caused a number of fatal car crashes and
other accidents. In 2010, the company indicated
the costs would be around US$2 billion, but a
further recall of 2.2 million vehicles followed in
early 2011.
The Wall Street Journal, August 15, 2007
16
Catlin Group Limited
The much-admired Toyota suffered a real blow
to its reputation for reliability and safety,
especially in the United States. Not only did it
face the expense of an enormous recall, but it
also paid US$48.8 million in fines from US
regulators for its handling of the recalls. The
company’s share price dropped. It lost market
share in the United States as sales fell. The
BrandZ survey of the top 100 global brands
estimated that the company suffered a 27 per
cent loss in its brand value in 2010.
Toyota has since made significant repairs to its
brand, and it has been able to boast of winning
top safety and vehicle dependency awards from
important organisations, such as J.D. Power and
Associates. Its value in the 2011 global brands
survey rose by 11 per cent.
The company has not disclosed the cost of the
extensive measures taken to restore customer
confidence, such as the assignment of a chief
safety technology officer and 1,000 engineers
to component design and quality.
Product Recall: The Developing Story
A bitter pill
SmithKline Beecham International recalled its
best-selling Panadol paracetamol
(acetaminophen) capsules from sale in all stores
in Australia and destroyed large quantities of
the product in June 2000 after receiving a
contamination threat and extortion demand.
Another Australian paracetamol maker, Herron
Co., had received a similar contamination threat
the previous March. Two people were
hospitalised after taking Herron tablets, which
were later found to be laced with strychnine.
Panadol was relaunched with new tamper proof
packaging in August 2000, but the extortionist
soon struck again. On police advice, Smith Kline
Beecham moved the painkillers off the counters
and restricted sales to customer requests only.
Even though the company was praised for
the way it handled the crisis, for the company,
consumer health care managing director, Alan
Schaefer, said in an interview that it was “down
a hundred million (Australian) dollars”.
One of the apparent victims of the poisoning, a
man, was arrested and charged with extortion
and attempted murder, but killed himself while
in prison awaiting trial.
17
Insuring the Risk
Manufacturers face huge exposures from product recalls, but
this risk can be transferred through the purchase of product
recall insurance.
Product recall insurance owes its development
to a spate of product tampering and extortion
cases, most notably the 1982, the ‘Tylenol
murders’ in the Chicago area which forced
Johnson & Johnson to recall the popular
painkiller nationwide. The incident highlighted
the limitations of product liability insurance.
Even now, a business can be left with material
uninsured costs for withdrawing and replacing a
defective product despite having an extension
to its product liability policy.
Today, product recall and product contamination
insurance policies respond to the much more
common scenarios of accidental contamination
or defect, as well as malicious interference.
They can help protect the company’s cash flow,
balance sheet and contractual obligations to
customers.
Product recall and product contamination
insurance reimburse the costs required to
remove a defective product from the supply
chain and restore a safe one, either by repair or
replacement.
The product does not need to reach the end
consumer or have caused damage or injury
before the insurance responds. It can also pay
withdrawal expenses and loss of revenue.
Comparison of product recall and product liability insurance
Recall expenses
Recall costs
Inspection costs
Destruction costs
Product repair or replacement costs
Slotting and re-slotting fees
Business interruption
Loss of gross profit for 12 months
Continuing overhead such as wages/salaries and depreciation
of plant and machinery
Clean down of machinery or plant
Subcontract manufacturing
All affected products included
Rehabilitation of brand
Public relations, promotional offers, advertising costs to restore
sales and market share
Consultancy advice
Damages resulting from product liability litigation
Product recall
Product liability
Yes
Yes
Yes
Yes
Yes
Yes
Yes*
No
No
No
No
No
Yes
No
Yes
No
No
Yes
* Not always given and may be sub-limited
18
Catlin Group Limited
The policy also covers important heads of
cost, such as business interruption, third-party
expenses, rehabilitation costs and extortion
demands. Small and medium-sized companies
can be driven out of business by such costs;
even very large companies can suffer balance
sheet and reputation damage.
“If you have a contamination which
triggers the policy, it can reimburse you for
any reasonable financial expenses to do
with the withdrawal or recall.”
David Burke, Catlin
There are two types of product recall insurance
designed to meet the needs of specific industry
segments:
•
•
Product contamination cover is suitable for manufacturers, processors, distributors and retailers of topical and ingestible products, such as food, beverage, restaurants,
cosmetics, over-the-counter/packaged prescription pharmaceuticals and tobacco.
First-party recall insurance is designed
specifically to cover manufacturers,
distributors and retailers of non-consumable goods, such as toy and child-related products, sports and recreational equipment, household appliances, home electrical equipment, tools and related products,
packaging and containers.
Product Recall: The Developing Story
Because of the combination of expert advice
and coverage provided for many of the direct
heads of expense connected with a product
recall or withdrawal, these insurance products
ultimately help the business facing a crisis
protect its reputation and its future.
Claims issues
Good practice in handling a recall will help
control the cost of the incident. The following
measures will help with managing the claim,
especially the important business interruption
element:
•
•
•
•
•
•
•
•
Notify the broker immediately once it is clear that there are circumstances which could give rise to a claim against the policy.
Give the broker as much information as
possible on the incident and probable costs.
Retain and present all product and recall cost invoices and documents.
Maintain all internal reports, product analysis, test results, etc.
Maintain detailed profiling of customer
purchase and product sales history.
Keep management accounts for the past three years.
Work closely with claims adjusters appointed by underwriters and respond to information requests in a timely manner.
Assist underwriters in subrogation against any third parties responsible for the loss.
19
Sources of Information & Advice
Catlin
www.catlin.com
Reading Scientific Services (RSSL) Food and pharmaceutical analysis and consulting
www.rssl.com
RQA Europe
Product recall experts
www.rqa-europe.com
RPC
Law firm
www.rpc.co.uk
Security Exchange Risk management
www.securityexchange24.com
Arium Risk Architecture
Risk modelling
www.arium.co.uk
GBI Research
www.gbiresearch.com
InterSys
Risk management software
www.intersys.co.uk
WeMakeItSafer Recall data analysis
www.wemakeitsafer.com
20
Catlin Group Limited
Catlin Crisis Management
Catlin offers a suite of recall insurance products
for companies operating in a diverse range of
sectors:
All these policies provide and pay for the
services of a panel of consultants with diverse
skill sets to assist clients in reducing their risks
and handling any incidents.
•
Food and drink contamination
Covers any manufacturer in the food and drink industry following a product
contamination and subsequent recall.
Coverage includes recall costs, consultant costs, extra expenses, loss of gross profits.
•
Automotive product recall
Provides automotive component part
manufacturers with recall insurance following a recall by an original equipment
manufacturer (OEM).
Ian Bailey
Class Underwriter
Tel:
+44 (0) 20 7105 3151
Mobile: +44 (0) 7796 677 150
Email:Ian.Bailey@catlin.com
•
Consumer products insurance
Recall cover for manufacturers of finished products that are purchased by consumers (i.e. toys, computers, clothes, etc.).
Andrew Kyle
Class Underwriter
Tel:
+44 (0) 20 7648 8126
Mobile: +44 (0) 7772 673 617
Email:Andrew.Kyle@catlin.com
• Restaurant contamination insurance
Provides business interruption insurance for
corporate and franchisee restaurant chains following a food-borne illness or malicious tampering.
• Pharmaceutical contamination
insurance
Covers manufacturers of topical and
ingestible pharmaceutical products sold to consumers and the subsequent costs
following a product contamination and
subsequent recall.
•
Water utilities contamination insurance
Covers water utilities for accidental and
malicious contamination and the subsequent clean up costs, extra expenses, goodwill payments, etc.
Product Recall: The Developing Story
David Burke
Senior Class Underwriter
Tel:
+44 (0) 20 7648 8155
Mobile: +44 (0) 7900 054791
Email:David.Burke@catlin.com
Catlin.com
Catlin Crisis Management
20 Gracechurch Street
London EC3V 0BG
United Kingdom
Tel: +44 (0)20 7626 0486
Email: CrisisManagement@Catlin.com