The U.S. Department of Agriculture announced Perdue Foods’ third major product recall of 2019 in a news release on May 31. The company recalled approximately 31,703 pounds of frozen and refrigerated chicken products for potentially containing foreign materials. In early January Perdue Foods also recalled approximately 68,244 pounds of gluten-free chicken breast nuggets due to possible contamination with wood fragments and issued a separate alert later that same month regarding approximately 16,011 pounds of chicken products that contained an unlabeled allergen: milk.
Product recalls, while common, can be highly disruptive to business operations. “A product recall can destroy a company,” explained Joseph Sweeney, Senior Broker, Burns & Wilcox Brokerage, Parsippany, New Jersey.
Tyson Foods recalled chicken strips beginning in January, pulling almost 12 million pounds of products from stores because they potentially contained metal fragments. Multiple companies were affected by a recent recall of beef tainted with E. Coli that sickened at least 196 individuals in 10 states, leaving 28 hospitalized and two with kidney failure.
Recalls growing in complexity and frequency
The global economy offers greater opportunity for manufacturers around the world, however broad distribution networks require complex supply and transit chains that add complexity to the product recall process. The United States ranked second worldwide in the number of product recalls in 2018; China ranked first and Taiwan third. No country is immune to the impacts of food recalls; in March, for example, the Canadian company Sofina Foods recalled its Janes brand chicken nuggets due to potential contamination with Salmonella; making this the fifth recall for Sofina and the 13th Salmonella-related product recall in Canada since May 2017. During that same period there were 555 confirmed cases of illness resulting from tainted chicken products in Canada, with 92 requiring hospitalization.
Product recalls are not a new phenomenon. 1982 marked the first major, widely-publicized recall when 31 million bottles of Tylenol-branded acetaminophen capsules were deliberately laced with cyanide by a still-unidentified assailant, resulting in seven deaths in the Chicago area. In 2012, the Sunland peanut butter recall represented the first time the Food and Drug Administration shut down a processing facility for public safety reasons under a new power granted to the agency by the 2011 Food Safety Modernization Act. Researchers have confirmed that product recalls increased 10 percent between 2013 and 2018; recalls of meat and poultry products increased by 83 percent during that same period.
The toll on companies can be high. “The amount of money it takes to get a product out of the stream of commerce is enormous,” Sweeney said.
No business is immune
Despite the prevalence of recalls in the news, Sweeney noted, “Most Business leaders do not think it is ever going to happen to them—until it happens.”
Company leaders may feel that they are protected by their own watchfulness, however as Derek Kilmer, Brokerage Manager, Professional Liability, Burns & Wilcox, Detroit/Farmington Hills, Michigan, pointed out, “You do not know, at any given time, what contaminant can get into your product—requiring your company to take recall action to ensure both public safety and product performance expectations are met.”
Product recalls happen across industries, sectors and locations. A 2019 U.S. Public Interest Research Group report showed that the sharp increase in meat and poultry recalls since 2013 can be partly attributed to the passage of the Food Safety Modernization Act in 2011. In the past year 125 food products were recalled, involving 20.5 million pounds of food.
You can do your best to mitigate a potential recall but, at the end of the day, every company involved in the supply chain, from manufacturers to distributors of goods are susceptible to losses that only a Product Recall policy can address.
Non-food product recalls are also more common than we may think. Overall toy recalls dropped from 28 in 2017 to 18 in 2018, yet toy recalls, due to lead, increased from zero to two during the same period. In the fourth quarter of 2018 pharmaceutical recalls increased by 11 percent and automotive recalls increased by 12.8 percent. Recalls can stretch out for several years, like the ongoing recall of Takata airbags, which began in 2008 and constitutes the largest product recall of all time.
“You can do your best to mitigate a potential recall,” Kilmer said, “but, at the end of the day, every company involved in the supply chain, from manufacturers to distributors of goods are susceptible to losses that only a Product Recall policy can address.”
The average cost of a recall to a food company is $10 million. “The most significant (costs are incurred) dealing with the aftermath of a recall,” said Sweeney, who noted recall costs can include cleaning and/or recalibrating machinery, buildings and equipment; paying salaries while operations are suspended; replacing products; and distributing replacement products.
According to Kilmer, the initial recall expense accounts for approximately 25 percent of the total cost of a recall, while 75 percent of the costs are incurred dealing with the effects of the recall through rectification, reputation repair, business interruption and other financial expenses. Third parties involved in the manufacturing or distribution of recalled products may also incur costs and will look to their manufacturer to make them financially whole as a result of their breach in their contractual obligations.
Mitigating the fallout
Product Recall Insurance coverage, according to Sweeney, covers the logistical process associated with product recalls. This includes transportation, destruction costs, as well as any additional workers that may be needed. It also covers product replacement costs.
Many Product Recall Insurance policies also include coverage for a variety of other costs, including business interruption and reputation damage. Most policies will go into effect whether a recall comes from an error in manufacturing, product guarantee or design flaw, Kilmer said. Other potential triggers include failure to meet a contract, a software product safety issue or a potential cyber breach associated with product tampering.
Some Product Recall Insurance policies may even cover a claim that stems from damages separate from a product, such as those resulting from negative coverage in the media. “It could be a tweet that has gone viral, a report in the newspaper, (something posted) on a website,” explained Amie Townsend, Product Recall Underwriter, Hiscox, London, England. “If that story sparks negative publicity on a specific product being unsafe or causing bodily injury, subsequently causing a recall, that company could suffer a downturn. The costs of rebuilding their brand, also known as ‘rehab,’ or rehabilitation costs, can be covered under a Product Recall policy.”
Given the multitude of potential causes of consumer uncertainty, Product Recall policies and coverage vary widely, so be sure to consult your insurance broker or agent for detailed information on your own needs and policies.
Proper coverage can provide a company with a roadmap through a difficult time. “Most Product Recall policies include crisis consultants, who can guide business leaders through the recall process, including who to contact, how to manage their brand reputation through various media channels and ultimately how they can get the product back into production,” said Kilmer.
Having Product Recall Insurance and a plan in place to address both the immediate logistics and long-term effects of a recall can make all the difference to a business in a crisis. “In a lot of cases, consumers are unlikely to remain loyal to a product or brand they have been with for a long time if they suffer a disastrous issue,” Townsend said.
Given the current atmosphere of increasing regulation and growing public awareness of companies’ practices and product recalls, Townsend said, “We are seeing more and more business owners prioritizing the purchase of product recall insurance.”