Total Recall

Upton Sinclair’s 1906 novel The Jungle exposed poor work and unsanitary conditions in the U. S. meat-packing industry, prompting social outrage and eventually the passage of landmark legislation including the Meat Inspection Act and the Food and Drug Act. More than a century later, stories of food safety and contamination are not central to any novel’s plot, but are spreading in news headlines across the globe, including Canada. As a result, businesses involved in the growth, production or preparation of food are looking at ways to reinforce their quality and risk management strategies to avoid any food safety issues and to prepare themselves financially to respond quickly in the event of a product recall.

ADVANCE PREPARATION

Advanced preparedness has become essential: regulators are under pressure to do more to reform and implement stricter oversight of food safety in an effort to minimize the increase in recalls over the last few years. One bill already introduced into the House of Commons in April aims to toughen Canadian product-safety laws. The bill’s content is similar to the government’s Food and Consumer Safety Action Plan, allowing the health minister to invoke mandatory product recalls, raise fines under the Food and Drug Act and force companies to report injuries, illnesses and defects stemming from their products.

More than 837 products were recalled between 2002 and 2006, not including automobiles, drugs and medical devices, according to a 2007 study conducted by the Toronto-based National Quality Institute. Approximately 69% of these recalls involved food. Allergy alerts are the most common reason for food product recalls. The second most common reason, representing about 20% of recalls, is the possibility of a dangerous ingredient or contamination of the food product by bacteria, toxin, virus or some other substance.

The price of contamination outbreaks in food can be costly, both monetarily and in terms of the loss of human lives (as Canadians have seen in recent months because of the deadly listeriosis outbreak).

When a salmonella outbreak in the United States began in April and sickened more than 1,000 people, tomatoes were thought to be the initial culprit. Consumers avoided buying tomatoes, and tomatoes were dropped from restaurant menus while the incidents were investigated. Although the outbreak appears to be over, the Center for Disease Control (CDC) and state health departments are continuing to conduct surveillance for cases of infection with the outbreak strain. Preliminary results to date support the conclusion that jalapeo peppers were a major vehicle of transmission and serrano peppers also were a vehicle. Tomatoes possibly were a vehicle, particularly early in the outbreak. Contamination might have occurred on the farm or during processing or distribution, but the ultimate cause has yet to be determined.

For food producers, having proactive quality systems in place is a key risk management strategy in preventing contamination from happening. It can also, as in the tomato incident, provide key evidence helping to clear the good name of a company or industry quickly, thereby minimizing damage to corporate reputations. Central to this is a company’s HACCP (Hazard Analysis Critical Control Points) plan that focuses on food safety and brand equity while incorporating a product-testing regime that constantly needs to be reviewed.

SUPPLY CHAIN RISK

In today’s global market, the supply chain presents significant risk management challenges. Having an appropriate traceability and recall plan in place is critical to managing supply chain risks. At a minimum, the traceability plan must adhere to the “one-step-up, one-step-down” principle, so that the company will know immediately both the person the product (or its ingredients) came from and the next person to whom it has gone.

Food companies tend to rely on certificates of analysis that accompany supplied goods. Ultimately it is impossible to remove the supply chain risk, but companies can go a long way towards improving that risk by building in testing programs for supplied ingredients and products, as well as carrying out appropriate due diligence and auditing of suppliers.

Some companies look at their recall loss exposure by looking at batches, lots or daily production and create a loss scenario based on testing cycles. This is a very useful way to estimate loss potential. But history has shown irregular and unexpected situations often cause the largest losses. In a contamination situation, the size of the recall will depend on the amount of identifiably affected products. For example, a company that segments production into small batches, tests each batch and only releases product once test results are known will be in a strong position to prevent a severe loss happening, assuming the contamination is picked up in testing. On the other hand, a company that segments production only into daily production amounts, releases product to the market and only receives test results on those products a week later will be more exposed to suffering a severe loss: at a minimum, it will have to recall the whole week’s worth of production.

Likewise, with the supply chain risk increasing, companies could also look to assess the potential impact of a contamination of multiple products by a contaminated ingredient. Due to their processes, some companies will be more exposed to a severity loss than others, but all companies should look to assess that exposure.

A sound business continuity plan will have in place contingency plans like back-up suppliers or the maintenance of spare production capacity in plants. In a recall situation, the last thing a company wants is to be left without the ability to get products back on the supermarket shelves quickly. The longer this takes, the higher the potential loss of retailer and consumer confidence and therefore the greater damage to a company’s reputation.

INSURANCE FOR A CRISIS

Although product recall insurance is available to address the expenses involved in the physical recall of food products, it is important to look at how coverage responds to addressing the expense and implementation of crisis management. For insurance providers, the question is not only how they can help prepare their clients to handle associated recall expenses but also to handle changing regulatory requires and best prepare clients to handle a recall crisis situation to protect vital business assets, including their reputation.

In a recall situation, however, it is important to note that a company’s General Liability (GL) policy may provide coverage against a third-party claim or product- related lawsuit. GL policies do not typically cover expenses related to product recall losses. A GL policy more than likely does not cover the cost typically representative of a product recall including business interruption expense, overtime and expenses for employees to handle the recall, product disposal costs or redistribution of new products. Often the business interruption loss will be limited to the amount of time it takes a company to restart production after a recall. Loss of customers and damage to the company’s reputation may have a more lingering effect. This is why product contamination insurers see value in not only providing their clients with coverage to help pay for outside communication assistance to address a recall situation appropriately, but often offer up-front communications guidance with public relations experts to develop an appropriate plan of action before faced with a re call, assistance with product security, laboratory testing or even regulatory advice.

Although product recall insurance is available from a growing number of insurers, only a small percentage of food suppliers are carrying the coverage. Many still consider product recall insurance to be a form of “luxury” coverage. That misperception is likely to diminish, since there is some talk of regulatory req uirements requiring businesses to carry product recall insurance.

Traditional product recall insurance will be more of a necessity in the food industry’s risk management plans, but greater attention to quality control and advance crisis management planning is equally important. Being prepared for a product recall in advance of it happening is vital; it is perhaps the difference between disaster and a client’s survival.

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For food producers, having proactive quality systems in place is a key risk management strategy in preventing contamination from happening.