Every year, contaminated food causes 48 million people to become sick, putting more than 128,000 individuals in the hospital1. With more than 1 million restaurants in the United States, foodborne illness can have huge implications for people, communities, and businesses2.
While a large restaurant chain like Chipotle may have their bases covered to navigate a staggering $1 billion loss3, smaller restaurants may not be so lucky. Mariscos San Juan, for instance, was a Mexican seafood restaurant in downtown San Jose, California. It was alleged that one sick food worker infected at least 80 people, hospitalizing many with an easily transmitted bacteria called Shigella4. While the costs of this outbreak are unknown, that restaurant is now closed.
“Many restaurant owners believe that General Liability (GL) Insurance will cover incidents involving foodborne illness, but in most circumstances GL does not cover these costly cases,” said Michael Muglia, Underwriting Manager, Professional Liability, Burns & Wilcox. “Less than three percent of restaurants purchase Product Recall Insurance to cover contamination.”
Muglia added, “The cost of slip and fall accidents covered by a GL policy pale in comparison to the hardship a family-owned restaurant can experience – in excess of $400,000 in certain instances, presenting far more financial risk.”
With a large majority of these potential clients underinsured, brokers and agents can step in as a resource to educate clients.
Why Product Recall?
“It may be called Product Recall Insurance, but while exposures from recall costs are minimal, it is the contamination and business interruption coverage that is most important,” says David Derigiotis, Corporate Vice President, National Professional Liability Practice Leader, Burns & Wilcox.
Product Recall Insurance provides first party expense incurred by the restaurant. This should not be confused with Product Liability Insurance – a separate policy which covers third party losses. To trigger a Product Recall policy, one of eight things may occur:
- Foodborne illness
- Supplier contamination
- Public health authority announcement
- Malicious tampering
- Adverse publicity
- Workplace violence
- Product extortion
- Disease outbreak
As a small establishment, if five people complain of food poisoning, for instance, or a health professional threatens a shutdown, insurance carriers provide a 24/7 hotline to call for advice on navigating the issue. The policy also covers testing the product, engaging with health professionals, FDA class 1 or 2 recalls, doctors’ tests for the sick patrons and staff, public relations expenses, and more.
If a local health official cites unsanitary practices, the policy will go through the stages and appeal that. Similarly, if a case of hepatitis broke out, testing would be arranged to rule out any staff as the cause.
“With the low margins that exist in the food service business, few would be able to handle all of these costs themselves before going bankrupt,” added Derigiotis. “In listening to feedback from owners, they have said that making people sick and a large drop in the patronage of their restaurant is what keeps them up at night.”
Keeping a restaurant cooking after the loss
“Business interruption can be one of the most expensive costs associated with an incident,” notes Muglia. “If food causes someone sickness and that news spreads, the Product Recall policy can help restore the restaurant’s image and make the owner whole.”
Derigiotis adds, “Before a lawsuit even occurs, negative press may lead to the closing of a restaurant. As soon as the public loses confidence, they will stop frequenting the business and tell others not to go—creating a ripple effect.”
The Product Recall policy itself will help manage the crisis and deal with the contamination to get the restaurant back on its feet as quickly as possible. In the food and drink category, sales can drop rather quickly, as they depend on day-to-day business. Business interruptions costs are covered for up to a full 12 months or when the restaurant returns to pre-loss numbers, whichever comes first.
“If the situation is addressed early and properly, it is possible to get past consumer fears in three to six months,” said Derigiotis. “However, a broker’s client may not be able to weather that storm without Product Recall insurance.”
Restaurants today cannot afford to ignore this exposure
“In the food and drink sector, many small businesses remain uninsured with big exposures, as their balance sheet is unable to sustain a prolonged hit to revenue,” said Muglia. “In these cases, the restaurant oftentimes goes bankrupt and closes its doors.”
Additionally, “the power of social media is often underestimated,” said Derigiotis.
Contaminating food was the center of a disgusting video posted by Domino’s Pizza employees on YouTube5. The brand’s reputation took a nose dive, and social media was taken over with negative sentiment initially, but has rebounded successfully since. Recovering from social media backlash can seem impossible for small restaurants, as once a post goes viral, there’s little to stop it, stated Derigiotis.
Muglia adds, “Product Recall usually gets brokers and clients alike thinking of the high dollar premiums associated with coverage for consumer products. Yet, policies for smaller ‘mom and pop’ restaurants can be very affordable to provide robust balance sheet protection.”
Education on Product Recall Insurance is the perfect way to start a conversation with these potential clients in the food service industry. A broker’s client may do everything right, but one short-sighted employee – as in the case with the sick worker at Mariscos San Juan and the prank at Domino’s – can cause irreparable damage.
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