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In an industry with razor thin margins, there is no doubt that food companies need to keep a close eye on expenses. When it comes to a cost item like insurance, nobody wants to over-insure as unnecessary premium expenditures can severely impact your bottom line. But at the same time, being underinsured can have an even more devastating impact. One negative event can easily eliminate an entire year, or more, of profit.
So, with the popularity and need for product contamination and recall insurance increasing, how does a food executive go about selecting an appropriate limit? How does one start to get a grip on the entire food safety event exposure?
A number of factors are leading food companies upstream and downstream in the supply chain to consider the addition of stand alone product contamination & recall insurance policies. Increase in regulations and regulatory enforcement under FSMA, supplier/vendor agreements requiring recall coverage, banking institutions requiring their customers to maintain this coverage if a line of credit is going to be provided. All the reasons are there for food executives to say “I NEED THIS”. But just how much of “THIS” do you need?
This is a great question, but unfortunately there is no possible way of providing a great answer through an article. The answer varies greatly depending on the type of food, where you’re company is placed within the supply chain, among other factors. But what this article can do is to provide you with a foundation of those cost items that must be considered when trying to get a grip on the actual exposure your company faces when quantifying a food safety event.
The primary goal of FSMA is to shift the industry from a culture of reacting to food safety events and illnesses to preventing the event in the first place. With that said, knowing that even the best laid plans fail, we will unfortunately continue to see consumer injures and deaths. From an insurance perspective, claims of bodily injury or death would fall under a commercial liability policy. The liability policy should also respond to claims of property damage (i.e., you sell contaminated product to a customer who uses it as an ingredient within their finished good, rendering that finished good damaged). Therefore, your liability limits, inclusive of excess or umbrella liability, should contemplate this area of risk.
However, when it comes to a food safety event, the list of potential cost/loss items extend well beyond claims of bodily injury or property damage. This is the area where product contamination and recall insurance plays a vital role – to cover those exposures not covered under commercial liability insurance.
Hopefully the following list will help your company in taking some initial steps in quantifying your company’s unique food safety event exposures.
- Replacement value of contaminated product, both sold and unsold.
- Recall expenses, inclusive of freight, labor, testing, and destruction costs.
- Your customers’ recall expenses
- Loss of profit related to the contaminated product.
- Ongoing loss of profit related to the loss of customers/sales following a recall event.
- Claims of economic damage, such as loss of profit and reputation damage from customers and other downstream 3rd parties.
- Brand rehabilitation – costs incurred by your company to restore your reputation in the marketplace.
- Crisis response consulting costs.
The primary goal of FSMA is to shift the industry from a culture of reacting to food safety events and illnesses to preventing the event in the first place.