The U.S. Food and Drug Administration (FDA) first alerted consumers in June about the presence of methanol, also known as wood alcohol, in nine products. Since then, the agency has expanded the warning to include 59 types of hand sanitizer, all reportedly produced in Mexico.
The affected sanitizers list ethanol or ethyl alcohol on their labels but have tested positive for methanol contamination. The recalls come at a time when hand sanitizer is in high demand due to COVID-19 and many companies, including breweries, have started producing it to help stem shortages. Health Canada has also recently issued recalls for hand sanitizers potentially contaminated with methanol or ethyl acetate.
“Some companies producing hand sanitizer are doing so for the first time,” said Michael Muglia, National Underwriting Director, Professional Liability, Burns & Wilcox, Detroit/Farmington Hills, Michigan. “Sometimes they are sourcing products outside of their normal supply chain and may not have the same quality control over the materials. That can contribute to faulty products that could injure people and ultimately be recalled.”
Mistakes happen, Muglia said. Nevertheless, companies can help mitigate their impact by investing in Product Recall Insurance and implementing strong supply chain management procedures.
“Recalling items can be expensive, depending on the product, and a company’s reputation can suffer,” said Tyson Peel, Vice President and Director, Property & Casualty, Burns & Wilcox, Toronto, Ontario. “That is what Product Recall Insurance is really there for.”
Damage from recalled products can be devastating
On July 1, the Consumer Product Safety Commission announced that the Boy Scouts of America was recalling 78,000 Cub Scout activity pins because the face and shaft of the pins contain levels of lead in excess of what is allowed under federal regulations. The pins were manufactured in China and sold from April 2016 to January 2020. In March, Health Canada announced the recall of a Grizzly Industrial, Inc. children’s toy tool set that was manufactured in China and could contain lead above allowable limits.
“It is so important to understand your supply chain and ensure that all parties within it will adhere to the quality controls set by the manufacturer or the buyer,” Muglia said. “That may not be the case when a product is designed domestically but manufactured overseas, and it can become particularly problematic.”
If injuries do occur because of a faulty product that is recalled, bodily harm coverage would generally fall under a company’s General Liability Insurance policy. Whether it is toxic hand sanitizer, lead exposure or foodborne illness, potential health hazards could be very serious, Peel pointed out, noting that class-action lawsuits could eventually result.
Although General Liability Insurance policies may provide a small amount for recall expenses, this would not cover the majority of recall-related costs. “That is probably the biggest misconception,” explained Steve Bartell, Broker, Burns & Wilcox Brokerage, Chicago, Illinois. “If you are a large manufacturer or food supplier, you definitely need a standalone Product Recall Insurance policy if you want to protect your balance sheet.”
Food recalls: Extensive, prolonged fallout
On July 7, KIND Healthy Snacks announced a voluntary recall of certain granola snack pouches that contained sesame seeds but did not disclose the ingredient on the label. The error occurred after KIND decided on a new, sesame seed-free recipe for its Oats & Honey Granola but mistakenly packaged product made with its old recipe in its new packaging.
In late June, nearly 60,000 pounds of chicken nuggets made by Pilgrim’s Pride Corporation in Waco, Texas were recalled for possible rubber contamination. The fully-cooked chicken nuggets were sold in 4-pound bags and distributed to stores in four states.
“For many companies facing a large recall, the loss of gross profit can be extraordinary,” said Bartell. “Business leaders who want to protect their balance sheets should ask themselves whether their company could overcome the losses associated with a $2 million product recall without Product Recall Insurance coverage.”
Product Recall Insurance helps companies pay for the cost of pulling products out of the marketplace, as well as other related costs. Included or add-on coverages may include loss of profit, third-party loss extensions, product replacement and quality control consulting services.
“Retrieving the product can be difficult and expensive, depending on how far and wide the product is spread around the country or the world,” Peel said.
Another potential expense of a recall is reputational damage. Repeated recalls of romaine lettuce due to E. coli outbreaks caused sales to plummet more than 40 percent in 2018 and left lasting concerns among consumers. This illustrates the value of the Adverse Publicity benefit of a Product Recall Insurance policy, Peel said: providing companies with advertising and public relations support to rebuild confidence in their brands.
“This process can be extremely difficult,” he added, especially when foodborne illness is involved. “Companies can see a dramatic drop in sales because consumers believe a brand is no longer safe and choose a competing brand instead. It can take some time to regain trust and recover.”
After a 2008 recall due to a listeria outbreak, Maple Leaf Foods in Canada spent at least $20 million on customer refunds and sanitizing costs and experienced a 50 percent drop in its packaged meat sales.
Without insurance, the cumulative costs of a recall could ultimately force a company into bankruptcy, Muglia said.
Pre-recall consulting strengthens procedures, helps mitigate losses
While not all recalls can be prevented, companies can use certain benefits of their Product Recall Insurance policy to help them strengthen their procedures and detect problems before a recall is needed. Many policies provide a consulting benefit that allows an outside expert to make sure a manufacturer’s quality control manuals are up to par, Bartell said. “In the event that something happens, you have someone designated to take charge of the recall procedures,” he said.
This is important, as a company’s response to a recall can help build customer loyalty. In one survey, 87 percent of customers said they would remain loyal to a brand that handles a product recall honorably and responsibly.
Close tracking of products should also be considered, which can save considerable time and money in the event of a recall. “Companies should be able to recognize quickly when there is a failure and be able to get all of the product back quickly,” Peel said, pointing out random batch testing is also recommended as a prevention measure.
This is a product that many business owners choose not to invest in until they are contractually required to do so, but your vulnerability to potential recall exists for anything you manufacture and could potentially force you to withdraw your product.
Pre-recall expenses may also be included in a Product Recall Insurance policy, Muglia said. “If you need specialists to assess a product and determine whether or not it needs to be recalled, pre-recall expenses could be covered,” he said.
Business owners weighing insurance options should be sure they understand what their particular policy covers. Some Product Recall Insurance policies are only triggered if bodily harm occurs, some when a company believes a product could cause bodily injury, and others may require a government-mandated recall in order to provide coverage, Muglia explained.
Full disclosure is key to appropriate protection
From meat processing plants to jewelry makers, any company involved in manufacturing is at risk for a recall. Smaller companies are especially susceptible to lasting financial effects after a recall. “There is a wide variety of companies in many industries that should have Product Recall Insurance,” Peel said.
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When discussing Product Recall Insurance needs, Muglia advises business leaders to be an “open book” with their insurance broker or agent and involve those who are well-versed in their process. “Brokers and agents can make the best recommendations if they are provided with all of the information they need,” he said. “Those directly involved in the company’s operation, those in charge of key segments, should be involved in the discussion and answering the questions as best they can.”
“Product Recall Insurance is a very specialized product,” Peel said, “and you need to work with an expert who is aware of the offerings.”
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As more companies are confronted with recalls, increasingly in the public eye, business owners are encouraged to seek out the expertise of their insurance broker, Bartell said. “This is a product that many business owners choose not to invest in until they are contractually required to do so, but your vulnerability to potential recall exists for anything you manufacture and could potentially force you to withdraw your product.”