Crisis Management with Product Recall and Contamination Insurance
By Edward Rhone, CPCU, AIC
Food safety is top of mind for retail customers, distributors, processors and growers. In this article, we will discuss the effective use of the crisis response hotlines in the product recall and contamination insurance (PRCI) policy, which often is overlooked when an unfortunate compromise to food safety occurs.
Sometimes referred as recall, product withdrawal, product contamination or product adulteration coverage, these policies have been developed to financially protect businesses in the food commerce chain. Most PRCI policies provide protection from accidental contamination, malicious product tampering or extortion by disgruntled employees, unhappy customers and terrorist/extremist groups. The policy usually provides reimbursement for the following types of expenses involved in a recall/products contamination event:
• The cost of a recall itself
• Income replacement to both you (first party) and your customers (third party).
• Increased expenses for transportation and warehousing costs
• Employee overtime
• Product testing and destruction costs
• Communication and media, advertising, brand rehabilitation and public relations
However, often overlooked is one of the most powerful protections of the PRCI policy. That protection is the policy’s “crisis hotline.” This hotline telephonically connects the policyholder to specialists chosen by the insurance company to provide professional guidance to an insured that has or believes to have suffered a product contamination event. The crisis professionals are experts in testing protocols, foodborne pathogens and illnesses, as well as dealing with the U.S. Food and Drug Administration (FDA). The crisis response team will assist an insured through the process to notify customers and suppliers up and down the food chain, as appropriate. They can assist in communications with state and federal authorities, strategize with you on the best approach to minimize the potential recall and help identify possible sources of the contaminants, which protects evidence and hopefully ends in successful recovery from the at fault party, if any. In addition, often underwriters will provide premium incentives for insureds to have their crisis group preemptively review recall plans and conduct audits or mock recalls, all with the eye towards loss prevention and mitigation.
Again often overlooked by policyholders, the crisis response provided by the policy may not be fully utilized. The reasons it is overlooked can be varied, including unfamiliarity with the policy, failure of first responders of a contamination outbreak to be aware of the insurance available or lack of training. However, one of the most prevalent reasons insureds may mistakenly not involve the crisis management group at the outset of an event is the PRCI policy has a significant self-insured retention (SIR) or deductible. Not utilizing the crisis management built into the policy because of the SIR can be a costly mistake.
Insurers want early intervention by professionals in an event to reduce or eliminate the event, which limits the insurance company’s financial responsibility. Generally, these crisis response resources are not subject to the deductible or SIR. The insurer encourages policyholders to use crisis response in the policy. As an incentive, most insurers do not apply the deductible to the use of the crisis response, as long as the policyholder uses the professionals provided by the crisis hotline. Insurance companies have determined early intervention in a contamination event greatly reduces the policyholder’s exposure.
A recent claim example may help illustrate the benefit of the crisis response. A food distributor had transported a product to a cold storage facility, awaiting its final shipment to the distributor’s customer in the southern part of the U.S. The product had a short sell-by date. Unfortunately, the cold storage facility experienced an ammonia leak while the product was in storage. Our client advised us of the event and we referred them to the crisis hotline in the client’s PRCI policy.
The crisis group immediately went to work, providing access to specialists in ammonia contamination, and providing instruction to the policyholder of how to interact with the state and FDA. While the other products in that cold storage had to be destroyed, our client’s product only needed to replace the outer-shell packaging of the product. The crisis responders were able to provide the best testing experts and then assisted the client in presenting this evidence to FDA, who allowed the product to be repackaged versus destroyed. The client saved not only the cost to replace its product but eliminated reputational damage with its customer for failure to deliver.
Similarly, another client had product shipped to its customer, who discovered Listeria in the product after testing. By utilizing the resources of the crisis response of the PRCI policy, it was determined the Listeria was introduced into the product after it had left the client’s plant and, as such, no claim was presented against the client.
In summary, policyholders of product contamination and recall should look for and locate the crisis hotline phone number in their insurance policy. The crisis hotline should be made known to the stakeholders that maybe involved in a contamination event and to utilize that number at the early outset of an event.
Edward Rhone, CPCU, AIC, has 30 years of claims advocacy experience, manages Parker, Smith & Feek’s claims department, and can be reached at email@example.com or by phone at (425) 709-3735.