Most food and drink manufacturers, indeed most businesses in general, would agree that the worst possible disaster to befall them is a major fire, halting production for many months. However, the financial stability of any food or drink manufacturer could also be seriously affected by another source – that of contamination. Nick Houghton, insurance expert, explains why:
What is product contamination?
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Product contamination can be interpreted in many ways, the consequence being that it is difficult to provide an all-encompassing definition. However, in relation to a food or drinks manufacturer an appropriate definition of a product contamination could be “an unforeseen event that results in a product being released onto the marketplace in breach of its specification”. In most cases an unforeseen event occurs as a consequence of either an accidental or malicious act.
Accidental contamination is the most common form of product contamination. The reason being that a product usually has to go through several stages of production before it is sold. Consequently there are numerous opportunities for the product to become contaminated say through an alien ingredient, incorrect dosage, production fault, packaging defect or labelling error.
A malicious contamination, whilst perhaps not as common, can be just as devastating; indeed, it may be timed to cause the maximum possible disruption. Any one of the following could, or at least make a threat to, contaminate a product – Vandal, Animal Rights Campaigner, Political Activist, Disgruntled Employee or even a Competitor.
As you can see, there are many ways and reasons for a product to be rendered in breach of its specification, and as such deemed contaminated.
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By GlobalDataWhat are the effects of a product contamination?
Legislation governing consumable products is vast and covers every aspect of a manufacturer’s business, from the raw ingredients used within the product to the labelling and packaging used to contain it.
For example, the UK Food Safety Act 1990 describes the offence of “rendering food that is injurious to health” and can impose fines or even prison sentences to those in breach of the Act. The Act goes on to state that if any part of a batch of food fails to comply with food safety requirements the whole batch is presumed not to comply, unless the contrary is proved.
The General Products Safety Regulations 1994 introduce a statutory obligation for producers and distributors of food to monitor products on an on-going basis and to “take appropriate action, including, if necessary, withdrawing the product in question from the market.”
The prime intention is to protect the consumer by reducing the risk of contamination entering the food chain and by removing products where they may be contaminated, which usually involves the manufacturer voluntarily recalling the product. As a consequence a food manufacturer could find itself in a situation where they must recall an entire production run, or indeed all products emanating from the same storage facility, when in fact, only a very small percentage may be, in fact, physically, contaminated.
What are the costs of a product contamination?
The media is quick to report any incidence of contamination whether it is in a piece of contaminated land or contaminated beef. This attention can be attributed to several factors, namely:
- Public expectation. We are increasingly food-safety conscious.
- We live in an increasingly litigious society.
- Manufacturers have a strict duty of care to their customers.
- Onerous packaging and labelling regulations
It is therefore imperative that any incidence of contamination and any ensuing actions are handled with great speed to minimise the danger to the public, and with great care and sensitivity to minimise damage to the company’s reputation and brand image.
However, it is important to recognise the fact that regardless of how prepared a business is or how quickly a product recall is executed, the actual physical expense of executing a recall can be huge. For example even the simplest product recall could expose a business to the following costs:
- Newspaper, magazine, radio or television announcements
- Transportation and accommodation costs
- Overtime costs paid to employees to execute the recall
- Cost of inspecting and disposing of the product
- Retail slotting fees and cancellation fees
- Cost of replacing any recalled product
The list is not exhaustive, but is a good indication of some of the actual costs involved in recalling a product. Unfortunately, the true cost of a product contamination to a business often goes much further.
What are the real costs of a product contamination?
The ultimate consequences are often more dramatic, as the contamination incidence leads to a lack of confidence in a product’s and indeed a company’s image and reputation, often resulting in a drop in sales. Consider the now “infamous” incidents that some major products / brands have suffered (eggs/beef/water). It can take months if not years to re-establish a product or brand to the level it enjoyed had the contamination not occurred. Indeed, some products and organisations never recover.
Experience has shown us that the cost to a business following a major recall incident can run into many millions of pounds, a cost not dissimilar to that of, say, a major fire. So why is it that almost all businesses accept the risk of fire as a distinct possibility and insure against such risk, yet the same business does not insure against the risk of contamination, but relies on the assumption that “it won’t happen to me?” The answer is twofold.
- Firstly the cost. In relation to fire insurance, contaminated products insurance appears hugely expensive. It must be remembered that fire insurance has been around for many years, there are a large number of insurers underwriting it and equally a large number of businesses purchasing it – thus maintaining a relatively low premium level.
In contrast, contaminated products insurance is a relatively new concept, with a very limited market offering cover and with only a small percentage of businesses purchasing it – as a consequence the premiums are greater.
Secondly, businesses and insurance intermediaries alike generally understand the concept of fire insurance. Yet contaminated products insurance is often avoided because of its specialist nature. It is perhaps this reason why many businesses are not aware of its existence or are not exactly sure what it is.
What is Contaminated Products Insurance?
Contaminated Products Insurance is designed to protect a business from a very specific event – a product contamination. The cover has developed from a specific need to protect against the costs of a product contamination, and provides protection in those areas where a business could lose financially, in addition to offering expert assistance to help mitigate the loss. The insurance would respond to a product contamination as follows:
- Firstly the insurer will involve, at their expense, a Crisis Management Expert to assist in handling the recall. They can be of great benefit when talking to the police or the media, or indeed in handling a major customer in such a delicate situation.
- The insurer will then pay for the many different costs involved in recalling the contaminated products.
- The policy includes cover for rehabilitation and marketing expenses incurred in reintroducing the product back onto the marketplace.
- Finally, any loss of gross profit as a consequence of the contamination would be covered.
As mentioned above, these costs and expenses could, in the worst scenario run into millions of pounds, regardless of how well the product recall is executed.
“I’m already protected”
It is a common mistake for a business to assume that their Products Liability Insurance offers protection against the consequences of a product contamination or product recall. In simple terms, it does not.
Product Liability Insurance excludes loss or damage to the actual contaminated product and any associated costs in advertising, recalling or making refunds in respect of any contaminated product. In addition a “Business Interruption” insurance policy will not cover any drop in profit following a contamination.
So can a product contamination seriously damage the health of a business?
The answer is most definitely yes, although many businesses consider themselves too small to suffer from the consequences of a product contamination, when in fact the severity of any financial loss to a company is relative to its ability to absorb such loss.
Ultimately the company has to make a commercial decision – to live with the risk and the unknown cost or to transfer the risk to an insurer for a known cost – the premium.
By Nick Houghton
