Food for Thought

Today’s increasingly complex, globalized supply chain, combined with tighter consumer and government safety regulations, has produced an environment where product liability costs are higher than ever. This is particularly true in the food industry, where contamination claims from outbreaks such as salmonella, E. coli and Listeria can create havoc from farm to supermarket.

Although companies use advanced quality-control efforts to limit the possibility of food contamination, incidents still occur and recalls become necessary. Insurance is a critical risk management tool that all companies in the food industry should employ to protect against the risk of food contamination claims. Businesses that are best prepared for these untimely events can limit the damage to both their brands and bottom lines.

FOOD RECALLS: COMMON AND COSTLY

Food recalls are not rare events. Figures from the U.S. Food and Drug Administration and the Consumer Production Safety Commission, both in the United States, and the Europe-based Rapid Alert System for Food and Feed (EU RASFF) show that in 2015, there were some 3,500 incidents in North America as a result of food contamination and 3,157 in the European Union (EU).

A Swiss Re study released in July, Food safety in a globalised world: Keeping our food safe in the 21st century, cites 2011 cost recall data from the Grocery Manufacturers Association that indicates more than half of all U.S. food recalls resulted in costs greater than US$10 million.

Liability costs involving food contamination are growing rapidly. For example, the Canadian Press reported in July that Canada’s largest meat recall in history – involving 1.8 million kilograms of beef alleged to be contaminated with E. coli – ended with a class-action lawsuit settlement of $4 million.

The impact on companies of food contamination cases can range from moderate to debilitating. When customers suffer illness or even death, a predictable loss in consumer confidence occurs. Consumers often stop buying the product, producing a significant dent in sales.

The inevitable fallout also includes considerable defence and liability costs incurred in large-scale litigation, such as consumer class actions, losses resulting from product recalls and business interruption, damage to reputation and, in some cases, bankruptcy. Ultimately, for smaller companies with fewer or weaker brands, a far-reaching, severe case of food contamination can prove too much to overcome, causing the business to shut down.

EVOLVING RISK

In today’s economy, with ingredients and technologies being sourced around the world, the food manufacturing process is complex, and there are numerous opportunities for something to go wrong. Risk is especially high for items coming from Asia, particularly China.

About 13% of recalls in the European Union in 2014 originated in China, notes a report issued by EU RASFF in 2014. This trend is unlikely to change in the foreseeable future.

The good news is that testing methodologies have improved and many more contaminants can be tested than 10 years ago. Clients are also more aware of how their products are used in other products. Yet, despite greater attention to quality management, human error still remains part of the process.

Ever-increasing government and consumer safety regulations also contribute to increased risk of recalls. These regulations vary around the world. In Canada, for example, Section 19 of the Canadian Food Inspection Agency Act grants the federal Minister of Agriculture and Agri-Food broad powers to recall food products – much broader than those in the U.S. and EU. This creates a high level of uncertainty for companies whose products have irregularities.

CHANGING RESPONSE

Prior to today’s more stringent reporting requirements, food companies executed “silent recalls,” in which they would replace bad product with good without informing the public. Since 2002, however, when the EU began requiring product defects be reported publicly, the game has changed for everyone. As a result, companies must now communicate promptly and openly when food contamination occurs.

Social media can also be a source of food contamination reports. A significant threat to companies is consumers reporting an incident on their own, particularly via public channels such as Twitter and Facebook. These reports may be inaccurate and, regardless of factual basis, require a company to respond in a reactive fashion to messages already in the public domain.

As much as social media can be a conduit for misinformation and adverse publicity, though, it can also be a vehicle for companies to provide an honest, personal and informative response that can help begin the rebuilding of a damaged brand.

PREPARATION IS CRITICAL

While companies can never predict when food contamination cases will occur, it is important to be as prepared as possible to deal with a recall crisis should it happen. Time is of the essence during a crisis and the response has to be swift, automatic and thorough. This can only be done if potential issues are repeatedly tested and simulated as part of a comprehensive crisis management plan.

Access to global crisis management resources

Part of a sound crisis management plan involves having access to global consultants who can address the situation promptly and thoroughly to limit potential damages. Global crisis management assistance companies can provide a round-the-clock global presence to manage product recalls and resolve emergency incidents. Their support also includes product testing in laboratories around the world, as well as advice and support on legal, regulatory and communications matters.

The larger the distribution network, the more extensive the product recall effort will be – and the harder the incident is to overcome. Assistance companies help by establishing incident management teams at the local level where the incidents occur and by interacting with local authorities and consumer groups seeking answers.

In addition to having feet on the ground, crisis management consultants operate at the headquarters level to oversee global incidents. Efforts at the local level should be co-ordinated with responses from management to present a united front with consistent messaging.

Scrutinize the details

Companies with significant liability exposure for food-borne illness risks are often surprised to learn after such events that they were not adequately insured.

Consequently, selection of carrier and coverage is vital. Quality, more than premium, should be the highest priority.

Moreover, compliant local coverage should be procured so that when a contamination event unfolds and the local governments become involved, the wording in the insurance policy is spelled out in the same language as the location of the incident.

How claims are to be paid is also key. For example, if an incident occurs in Mexico, you likely want the claim to be paid in that country. However, transferring claim payments into the country where the incident occurred can be a significant problem. A compliant international insurance product will help ease these concerns.

Risk managers should ensure the insurance product is of high quality and backed by sufficient security. Many small carriers provide product liability insurance, but they often have small portfolios and may not be able to cover all losses in the event of large claims.

Finally, do not forgo coverage without carefully considering the risks and benefits of doing so. If the company is involved in a tainted food incident, the premium, in hindsight, may seem like a small price to pay.