Product recalls make great headlines, especially when they involve public companies. Last year in Canada, one of the biggest news items was when food giant Maple Leaf Foods recalled 220 types of packaged deli meats because of listeriosis contamination. The contamination was described as the worst listeriosis epidemic in the world by the Canadian Medical Association in its September 2008 journal. More than 20 people died after consuming the contaminated meat. Apart from the public relations fallout, the recall cost the company more than Cdn$25 million.
Yet, sales of product recall insurance are slow. A Maple Leaf Foods spokesperson confirmed that the company does not purchase such cover, even though it does have food liability insurance, including cover for malicious tampering. Large organisations prefer to self-insure that particular risk.
The most prominent insurer in the product recall space is AIG, which originated the product in the early 1980s. Other companies that offer the product include Chubb Corp and Lexington Insurance (an AIG company).
Peter Braund, an insurance partner at law firm Borden Ladner Gervais (BLG) believes the slow uptake of this insurance is primarily economic. "It's very expensive," he notes. However, such insurance has a place in a company's risk management strategy. The standard comprehensive general liability (CGL) policy contains a number of exclusions which impact on an insured's ability to recover product recall expenses.
"It makes sense for food and drug manufacturers and other companies with a high risk of product recall to consider purchasing product recall insurance," Braund says.
XL Insurance Sees Opportunities in Canada
XL Insurance has been offering product recall cover through its London office for four years now. Its senior underwriter for product recall insurance, Ed Mitchell, says his company is shifting its focus to risk prevention, with part of the premiums dedicated to crisis and recall planning.
"Traditional insurance covers financial loss but our solution goes a step further by including the crisis consultants even before an event. These consultants specialise in public relations, product security, laboratory testing and regulatory advice," says Mitchell, who is based in London and has 12 years experience in product recall underwriting.
XL Insurance uses crisis consultants, Global Quality Consulting, headed by Steve Gruler. The company is based in Phoenix, Arizona.
Underwriting Challenges
Product recall specialists find it challenging to "really understand the level of risks policyholders face", Mitchell says. Companies often ask underwriters what sorts of limits they need to buy. "We tell them they should know as it is their business."
It is also difficult to theoretically model losses stemming from recalls as so many things can go wrong. "When assessing a food risk, we look at the likelihood of a recall happening and, should it happen, the potential severity of the loss. We look at a company's quality assurance, product testing regimes, segmentation of production, traceability systems and recall planning," Mitchell explained.
Stephen Harper Promises Better Regulation
Canadian Prime Minister Stephen Harper has promised greater protection for consumers. Two bills, C-51: An Act to Amend the Food and Drugs Act and C-52: An Act Respecting the Safety of Consumer Products have gone through second readings, but have not been passed as Parliament is prorogued.
When the bills become law, industry will be subject to greater regulatory oversight, including mandatory recalls, says BLG's Braund. And if the European Union experience is anything to go by, increased regulation will lead to higher sales of product recall insurance, predicts Mitchell.
Indrani Nadarajah - Indrani Nadarajah is a journalist with 15 years international experience. She has written extensively on the Australian and Asian ...
