Insurance Premiums represent the third or fourth highest business expenses for most food manufacturers and distributors. But, even with all of those premium expenses, many food producers and distributors find that their food recall claims are denied by their insurance company. What do you need to know to make sure that your next food recall claim is covered? Here are the key issues:
Commercial Liability Policies Are Not Enough
Make sure that your commercial liability policy covers claims arising from your products. Your commercial liability policy will be triggered if the
re are claims of bodily injury or property damage to third parties. But, what about your recall expenses? You will likely be facing recall chargebacks from your customers, product disposal expenses, investigation costs, and notification costs. None of these expenses are covered under your standard commercial liability policy.
Recall Insurance Coverage Is Critical
Depending on the size of the recall, you could be faced with significant costs associated with investigating the cause of any alleged food issues, notification expenses, chargebacks from customers who may have pulled the identified items from shelves and disposed of the product, and your own product disposal costs. You may also have additional employee costs and transportation expenses associated with the recall. An expert in crisis management or food recalls may be helpful to your efforts, but will, of course, be an additional expense. Food recall coverage exists to cover most or all of these expense items. The time to explore this coverage is before you have a significant food recall event.
Business Income Loss
It is also important that you have business income or business interruption coverage. In many cases, the recall event will result in decreased profits for your company over the short run of 6-18 months. Insurance companies provide business interruption coverage not only for catastrophic losses, such as a complete fire loss, but also for food recall events. If you want to make sure that your economic losses are covered by insurance, you will need to make sure that your business interruption coverage works hand in hand with your recall coverage.
Not All Recall Coverage Is Alike
This is a particularly important point. When there were significant spinach recall issues several years ago, the most common type of recall coverage at that time excluded claims unless it was alleged that the policyholder’s product specifically caused bodily harm or death, and that a government entity required the recall. At that time, it was one producer in California that was the cause of the E. coli event, but that one event affected the entire spinach industry. Also, no government entity, including the Food and Drug Administration, ordered a recall. At the time, the FDA lacked such authority. Yet, many spinach producers and distributors had real economic losses as a result of the E. coli outbreak. More recent forms of coverage would be triggered and cover these expenses, even if an individual policyholder’s own product was not the source of any alleged problem. Make sure that you have the broadened coverage.
There are, of course, additional issues that we see with food product recalls. Following the basic advice above, however, will go a long way to protecting your food business from food recall events.