“Return to Sender”
Insight on Product Recall
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Disclaimer
Insurance forms and endorsements vary based on insurance
company; changes in edition dates; regulations; court decisions;
and state jurisdiction. This instructional material provided by
Insight Insurance Consulting and the Insurance Community
Center is intended as a general guideline and any interpretations
provided by Insight, Insurance Community or presenters do not
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Copyright 2010 – 2013 All Rights Reserved
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Your Instructor Today
Al Parizo AFIS ACSR
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Couse Objectives
• Understand the exposure
• Cover the basic triggers of coverage to
understand the product
• The Insurance Agreement
• Be prepared to negotiate an offer in the
Non- Standard market
• Make recall a standard option in our
offers of coverage
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Some Interesting History
• Products Liability first became available in
England in1890. The target of the
insurance were pie bakers who at times
were known to inadvertently add roach
powder to the baking dough. It is
uncertain why these accidents happened
but perhaps the bakers mistook the roach
powder for powdered sugar.
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Some Interesting History
• Whatever the reason, this form of
protection for bakers came to be
appropriately known as “poison
insurance”.
• It was about 20 years after it was first
sold to bakeries in England that
products liability insurance became
available in the United States.
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Where’s the coverage?
Recall
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Ripped from the headlines
• Published: Aug. 1, 2013 at 11:15 AM
Updated Aug. 1, 2013 at 12:08 PM
• National Beef Packing Co., a Kansas
company, has issued a recall of 50,000
pounds of beef over an E. coli
contamination.
• The products, which were shipped
nationwide, could be contaminated with
E. coli O157:H7
•
Insurance
Community University
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How Do You Want Your Burger?
• Hopefully, without a side of E. Coli
• WinCo Foods of CA expanded their
recall for hamburger ground beef in its
70 WinCo Food Stores
• They are investigating their supply chain
to determine the cause of
contamination
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More Beef
• To close out a dismal 2010, 34,373
pounds of organic ground beef recalled
• First Class Foods of Hawthorne CA
confirmed E. Coli contamination in
packaged products shipped to CA, NJ,
NY, NC, WI, and WA
• No injuries reported to date, the
company established a hot line for recall
claims management
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Bringing Back The Lettuce
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Bagged Salad | August 23, 2012
Recalled
• Dole Fresh Vegetables is recalling 1,039
cases of bagged salad due to the
potential that it may be contaminated
with Listeria monocytogenes.
• The California-based company issued
the voluntary recall Wednesday after a
sample of its Dole Italian Blend taken by
the North Carolina Department of
Agriculture tested positive for Listeria.
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Fries With What?
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PB and Claims
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Peanut Butter
• In 2009, Salmonella in peanut butter products
sickened 475 people in 43 states and Canada
• Salmonella typhimurium may have
contributed to 6 deaths according to the CDC
• Outbreak traced to the Peanut Corporation of
America (PCA) processing plant in Blakely,
Alabama
• PCA is presently in bankruptcy
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Salmonella
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Bacteria Doesn’t Need a Passport
German Inspector Sorts Impounded Spanish Cucumbers
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New E-Coli Strain in Europe
• Spain, Italy and Germany had 1500 ill
and 15 fatalities.
• New strain of bacteria source still
unknown.
• Suspected source of Spanish
Cucumbers, Tomatoes and Sprouts.
• Impounds and Embargoes cost food
producers millions of Euros and strain
political relations.
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CAUSES in USA?
• Some point to consolidation of small
operations into CAFOs concentrating
poultry, pigs and cattle to the point
where if one gets infected, they all do
• Others point to understaffed and
underfunded Food Safety inspection at
the state and federal level resulting in
lax oversight where food is processed or
stored
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Hold The Tomatoes
• In 2008, 21 cases of the “Saintpaul”
strain of Salmonella found in and
around Port Arthur, Texas
• Texas Department of State Health
Services focused investigation on
shipments from New Mexico and
Arizona
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Recall Coverage Overview
What’s the risk?
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It Is About CGL Exclusions
n. Recall of Products, Work or Impaired
Property
Damages claimed for any loss, cost or expense
incurred by you or
others for loss of use, withdrawal, recall,
inspection, repair, replacement, adjustment ,
removal or disposal of:
(1)Your product;
(2)Your work; or
(3)Impaired property;
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It Is About CGL Exclusions
if such product, work, or property is
withdrawn or recalled from the
market or from use by any person or
organization because of a
known or suspected defect, deficiency,
inadequacy or dangerous
condition in it.
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The fruits of the exclusion
• Topps Ground Beef recall in 2010 cost
$12 million in BI claims.
• GL and layered XS responsive.
• Recall costs for I year’s production,
however, bankrupted the company.
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Recall Coverage Overview
• Primarily a Business Interruption claim
with a different trigger
• Not traditional “third party” coverage
but first party direct and consequential
damage
• Best suited for creative non-traditional
forms from creative underwriters
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Direct Costs To Insured
• Expenses to remove the product from
the market
• Extra expenses to contact customers
• Cost to destroy the product along with
the product’s value
• Replacement cost of the product
• Legal and regulatory compliance costs
(e.g. testing and inspection)
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Some Indirect Costs
• Damage to reputation and brand
• Long term losses to category (e.g.
consumer drop in demand until trust
restored)
• Increased marketing and advertising
expenses to recover market share
• Increased regulatory and testing costs
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Some Other Consequences
• Loss of market value can lead to
shareholder lawsuits (D&O)
• Loss of stock value in employee 401(K)
can lead to Fiduciary Liability lawsuits
• Once optional, offers for D&O and
Fiduciary Liability are now critical in the
proposal protocols for the Agricultural
Agent to Client
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Recall insurance
• A non-traditional insurance policy using
Business Interruption techniques
• Combines Risk Management with Risk
Transfer
• Specialized claims handling to manage
reputational loss critical
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Triggers for Coverage
Policy Responses
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Triggers For Coverage
• Product Integrity. Broadest trigger
requires only a reasonable expectation
by the insured that the product could
cause harm.
• Example. Gerber recall of baby formula
distributed in South America because of
an error in translation of mixing
instructions from English to Spanish. No
injury, no mandate for recall but could
trigger policy response.
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Intermediate Trigger
• Trigger requires BI or PD to consumer or
regulatory demand
• The regulatory demand (e.g., the FDA or
DOA) need not involve BI or PD
• Either event could trigger the policy
response
• More limited in scope than Product
Integrity but more palatable to
underwriters
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Limited Trigger
• There must be BI or PD and a regulatory
demand to recall the product
• Unlike the intermediate trigger, the
product must simultaneously cause
harm and have an official demand to
recall
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Various Types of Insurance
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Products Integrity Coverage
Products Tampering Coverage
Malicious Product Tampering (MPT)
Accidental Product Contamination (APC)
Products Extortion Coverage
Product Withdrawal
Products Recall
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Other Triggers
• Accidental Product Contamination
• Product Tampering
• Product Extortion. Pay subject to the
threat of product tampering. This can be
added to most commercial crime forms
along with Kidnap and Ransom
coverage.
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Inspect and Negotiate
• “Contamination” is the default trigger
for most carriers.
• Review the definition of “contaminated
product”, e.g. does it require a
companion GL product liability
response? Will it allow a voluntary
recall?
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It’s Official
• Federal Food Safety Modernization Act
signed into law 1/2011.(FSMA S. 101)
• Stronger Access Authority by FDA.
• Mandatory Recall Authority.
• Increased Inspection Frequency.
• Whistleblower Protection.
• Refused Admission of Imports if
inspection refused.
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HACCP Mandatory
• The new law requires a Hazard Analysis
and Critical Control Point safety plan for
food manufacturers and processors.
• A Product Recall plan is part of this
procedure.
• You can help, after all, this is Risk
Management!
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Recall Authority Under FSMA
• Stronger records Access.
• Triggered when “reasonable probability”
of serious adverse health consequences.
• FDA can access records of other food
affected in similar manner.
• FDA must show credentials and a
written notice.
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Mandatory Recall Triggers
• If FDA finds probability of adulteration
or misbranding and:
• There may be serious adverse health
consequences, then
• FDA must provide opportunity for
voluntary recall.
• FDA will file an informal hearing within
two days of order to determine if
mandatory recall required.
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Class I
• Involves a health hazard where a
reasonable probability exists that eating
the food would cause serious, adverse
health consequences or death.
– Example: E. coli O157:H7 in raw beef;
allergens such as peanuts or eggs (not
listed on the label).
– Your recall policy trigger should always be
crafted to respond to this event.
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Class II
• This type of recall indicates a potential
health hazard where a remote
probability of adverse health
consequences from eating the food
exists, or if the resulting condition is
temporary or medically reversible
– Example: Presence of FD&C Yellow #5 dye
in candy .
– Be careful of your recall policy trigger, some
won’t respond.
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Class III
• Consumers not likely to experience
adverse health consequences…so why?
• Usually because they violate FDA
labeling or manufacturing regulations
(e.g. shipped in defective containers)
• Most recall policy triggers won’t
respond
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Increased Inspection Frequency
• FDA to immediately increase frequency.
• FDA to apply “risk based” approach to
determine priorities.
• Here is an example of a government
recall.
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Government Recall
• WASHINGTON, February 27, 2012 - London Meat
Company, a New York, N.Y., establishment, is recalling
approximately 200 pounds of country breakfast
sausage because it contains monosodium glutamate
(MSG), which is not declared on the label, the U.S.
Department of Agriculture’s Food Safety and
Inspection Service announced today.
The products subject to recall include:
5-lb boxes of “Milano’s Country Breakfast Sausage,”
containing 80 sausage links per box
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Whistleblower Protection
• Protects employees who report
violations.
• Testify, assist or participate in violation
proceedings and/or:
• Object to “activity, policy, practice or
assigned task” they reasonably believe
to be a violation.
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Imports
• Foreign establishments must allow entry
to U.S. inspectors within 24 hours of
request for entry.
• Failure to comply will result in imported
food refused admission.
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FDA Action On Imported Citrus
Reuters) - Fears that the U.S. might ban imports of
orange juice from Brazil drove orange juice futures
to an all-time high on Tuesday as health regulators
began testing all incoming shipments for traces of
an illegal fungicide called carbendazim.
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Imported Salad
• WASHINGTON (AP) - Taylor Farms of
Mexico, a division of a California-based
produce supplier whose greens go to
national restaurants including Red
Lobster and Olive Garden, shipped
parasite-tainted salad mix that has
sickened hundreds in Nebraska and
Iowa, U.S. health officials said.
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FSMA Enforcement
• FDA's investigation did not implicate
salad mix packages sold in grocery
stores, officials said. As a result of the
probe, the agency will step up
surveillance of leafy products exported
to the U.S. from Mexico.
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Feds take action
• FDA officials, in conjunction with
company leaders, will conduct an
environmental assessment of the
processing facility in Mexico to
determine the probable cause of the
outbreak. State officials had said the
salad mix included romaine and iceberg
lettuce, along with carrots and red
cabbage.
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The fallout.
• Siouxland (IA) woman sues Olive
Garden owner claiming salad made her
sick.
• More lawsuits sure to follow.
• Bodily Injury a question of limits (CGL,
XS).
• Recall and reputational losses are a
different matter.
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Who Pays Continued
• Recall is risk that is real and pervasive in
any business
• The discussions of risk management and
options for risk transfer must be
addressed in any new and renewal
insurance proposal
• Identifying risk and giving choices to our
clients is what we do
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The Insuring Agreement
Language of risk transfer!
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The Insuring Agreement
• “You get what you negotiate, not what
you deserve”(anonymous)
• Should cover the cost of the recall up to
the policy limit
• Replacement cost of the product
• Rehabilitation costs
• Disposal, testing and other extra
expenses
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First Party
• No coinsurance
• There can be a participation clause and
retention
• The application will often be a warranty
• There will be a survey and inspection
with contingencies and requirements to
be complied with and often warranted
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Third Party Coverage
• When a third party uses the insured’s
product, their revenue is impacted by
the insured recall (think contingent
business interruption)
• Some companies offer a separate limit,
often called Coverage B, for third party
liability to cover their expenses and lost
income associated with the insured
recall(This is a critical consideration)
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Third Party Example
• Peanut Company of America (PCA) recall
affects other businesses
• Cracker manufacturers that used their
product
• Ice cream using PCA’s peanut butter
paste
• Bulk purchasers of PCA products who
repackaged and retailed own brand
• All created (uncovered) litigation
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The Supply Chain (Example)
• Whey purchased in bulk from Chinese
supplier
• Manufacturer who uses it in pet food
formulation
• Wholesalers who buy in bulk and
repackage
• Retailers who buy from wholesaler or
directly from manufacturer
• See the linkage? (let’s discuss)
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Risk Transfer
• Recall offer should not be limited to
client’s direct exposures only
• The direct coverage is often labeled
Coverage A
• The offer should include Third Party
Liability (Coverage B)
• Remember, A and B may be subject to
an Aggregate Limit
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Risk Management
• Working with a competent carrier's
application and survey can help identify
improvements needed in operations
• Exposures in supply chain
• Protocols for safe handling and storage
• All value-added services that will help
you in a client relationship
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Claims Management
• Protecting brand identity is a primary
consideration
• What additional steps does the Claim
Department feature to help manage the
recall?
• Consider this carefully when going to
market
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What If They Won’t Buy It?
• If they don’t, it should be because you
gave them the choice
• The offer to quote should be a standard
part of your proposal. Always get a sign
off on your offers.
• The process to quote will take effort
• Two benefits ensue
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Two Benefits
• If they don’t buy it, the process will give
them a better understanding of their
recall exposure with you as the enabler
• If they buy it, they get not only risk
transfer within the policy terms but loss
control and claim resources to improve
their business
• Neither can happen unless you make an
offer
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What Now?
• Product recall exposure is pervasive in
the supply chain
• All businesses needs to address risk
management and have risk transfer
options
• This is where you come in!
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Agents And Brokers
• Partner with a good resource to offer
product recall options
• Insurance Company or third party loss
control can help a client prevent a recall
problem from happening or manage
one efficiently if it does
• Make a product recall offer a standard in
your proposals and require a sign off if
declined
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Who Pays?
• Ultimately, the business, usually out of
operating income
• If they have Recall coverage, their
bottom line has less stress
• In addition to the Recall coverage up to
the policy limit, effective claims
management can protect their
reputation
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Who Pays Continued
• Recall is risk that is real and pervasive in
today’s business climate.
• The discussions of risk management and
options for risk transfer must be
addressed in any new and renewal
insurance proposal
• Identifying risk and giving choices to our
clients is what we do
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Some Resources
 www.Expertrecall.com. Consulting firm
with resources for recall notification and
response, remedies, resolution and
retrieval.
 www.XLcapital.com. Announced a recall
policy and partner with www.razor-pr.com
for loss control and claims management.
 www.chartisinsurance.com has new recall
insurance and risk management products.
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Some More Resources
• www.fda.gov for the Food Safety Act
regulations.
• www.cpsc.gov for the Consumer
Product Safety Commissions updated
list of recalls.
• www.ibawest.com for access to a new
contamination recall policy.
• www.recallresults.com, a resource for
risk management.
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