Marketing product recall insurance has now moved from agreeing the concept of cover (‘Why should I buy this?’), to cost of coverage (‘What value do I get from this?’), to the final stages of clarity (‘Will the cover perform?’) and claims (‘Will all my financial losses be reimbursed?’).
Despite that, many buyers of product recall insurance – and brokers who have not handled a lot of product recall cases – concentrate on the trigger. They put a tremendous amount of effort into writing detailed definitions around what might cause products to be recalled and define the likely costs they will incur in the moment of crisis.
When a product is withdrawn, the immediate costs are usually very easy to anticipate:
- Bringing together the crisis team
- Removing the product from the market
- Investigating the cause
- Managing public relations
However, we estimate that 80 percent of the total financial losses are incurred long after the offending products have been discarded. As well as being long-term, these costs are also very difficult to define. For example, how can you prove why customers still don’t buy the product a year later?
A forensic accountant can relate the policy language to resultant loss of profit. This can yield significant extra value beyond the immediate increased costs of working.
The importance of claims handling
Clearly, claims handling is the true shop window of any sophisticated coverage and is how a specialist claims team creates ultimate value for clients.
Claims are complex and it takes time – often more than a year – to understand the full extent of losses. The trigger needs to be identified correctly as well as the complexity of losses that mount up after the event.
Three key items to help prepare you in advance include:
- Anticipate what a loss adjuster would want to know, take advice, and rehearse your reporting.
- Simulate a recall to gauge your company’s readiness to handle communication.
- Identify your key people – lawyers, public relations professionals, recall specialists – who would have a role to play if
one of your products was recalled. Your insurer may pay for these advisors.
Here are examples of issues our team has worked on, which illustrate the most common losses:*
1. Raw product goes up in value
When a raw meat supplier had to recall its products, it sourced them from elsewhere so it wouldn’t breach obligations to the customer it was supplying. The spot price of those meat products was five times higher, and our client successfully claimed for the difference in those costs.
2. Rejected stock used for another purpose, selling for less
A fresh produce supplier turned its product into animal feed (which sold at a much lower price) after a small amount was found to be contaminated with salmonella. The insurers covered the full difference in value.
3. Despite a small problem, a big amount has to be discarded
Weevils were found in large sacks of rice, so the entire lot was thrown away to maintain the brand’s reputation. Even though only a small amount of the stock had been infected with the weevils, the insurers paid for the full loss of stock to maintain the brand’s reputation.
4. Supplier forced to reimburse customer’s total losses, including abandoned marketing campaign
A large fast-food restaurant chain had created a marketing campaign around a special ingredient. When that ingredient suddenly had to be recalled (and the campaign abandoned), the company demanded full reimbursement of the campaign costs. We argued successfully to the insurer that their short-term loss would be in the client’s long-term interest: This was a sensible strategy to keep in place its contract with an important customer.
5. Loss caused by physical damage to property
Rain fell through a hole in a warehouse roof and spoiled a consignment of cheese. The property insurer quickly paid for the roof to be repaired, but we led lengthy negotiations between all the insurers over consequential losses (such as the loss of the cheese). We reached a satisfactory compromise.
6. Produce mislabeled and has to be repackaged
A product contained peanuts, but this was not mentioned on the original labeling. The insurer covered the cost of re-labeling the full consignment.
7. Loss caused by damaged packaging, usually supplied by a different company.
Faulty lamination meant chip packets were not sealed properly, allowing air into the product, which would have made the chips go stale. The chip company successfully argued that the packaging supplier should cover the costs of the full recall and replacement of the damaged products.
8. Small component causes large losses in a complex supply chain.
A relatively small component ($2 each) in a car’s catalytic converter was faulty. The car company successfully argued for compensation to cover the full cost of recalling all new cars and replacing the full exhaust system on each one ($100 each).
Your contacts at Lockton:
Ian Harrison leads Lockton’s team of product recall specialists, based in London. Together, they place around US$20 million into global markets each year. They also work with our claims specialists, to negotiate payments to clients that have suffered loss through product recall. These matters are normally very complex, and require careful liaison with insurers. Adrian Parker specialises in claims. In the last 12 months, Lockton’s specialist claims team has secured product recall claims valued more than US$60 million.
Ian Harrison, Partner | Tel: +44 20 7933 2297 | firstname.lastname@example.org
Adrian Parker, Assistant Vice President | Tel: +44 20 7933 2202 | email@example.com
*To protect client confidentiality, we have removed the names of the companies.