Kerry Tuma is a Certified Food & Beverage Insurance Advisor with the Leavitt Group. The Leavitt Group provides Insurance & Risk Management solutions to Food, Beverage and CPG companies in all stages and sizes of operation.

Insurance might seem like an extravagance to the small business, but Leavitt Group has seen countless examples of why insurance is an important consideration for any CPG. The following fictionalized exchange illuminates the risks to skipping insurance, or being underinsured.

Recall Update – Supplier’s Fault

Dear Retail Buyer,

We are writing to provide you with an update of our recall. Over the course of the past several days, we have fully cooperated with the United States Food and Drug Administration (FDA) and state health officials in their recall investigation to determine the extent of the affected products and supply chains.

The initial recall was issued by our supplier, Supplier D, after a Supplier D customer tested and found trace amounts of an undeclared allergen in its products. Supplier D supplied us with raw materials and ingredients used in many of our products and finished goods. Because we relied on Supplier D’s certifications that its products were allergen free, we did not test Supplier D’s raw materials and ingredients or our products before sending them to customers.

Operations Suspended

As we continue our efforts with the FDA and state health officials to clean our facility and determine the extent of the contamination, we are also looking for new suppliers and expect to resume production within the next few days.

Please Don’t Leave

We are very sorry for the inconvenience Supplier D’s recall has caused our customers. We are working quickly to determine the scope of the recall, return to operations and get our products to our customers. We hope you understand that we are doing everything possible to avoid any further disruption to your business.

Without Insurance, Who will Pay?

Supplier D has advised that its insurance program is inadequate to provide coverage for us and many of its other customers. While our lawyers will continue to work with Supplier D and its insurers, we do not expect Supplier D to be able to compensate us or many of its customers for lost profits and associated recall costs. Once we have determined what recourse we have against Supplier D, we will begin to work with customers regarding their specific losses. In a few days we expect to send each customer a recall form and ask that you provide us with all of your loss information, including but not limited to lost profits; value of finished goods; unused raw materials, ingredients or products; destroyed inventory; customer credits; labor costs; freight costs; warehouse or storage expenses; and associated travel expenses.

If you have any questions, please let us know. Thank you for your time, consideration and patience as we work through this recall.

Sincerely,

Your Brand

The events depicted in the above scenario are fictitious and any similarity to any company, product or person is merely coincidental. However, the financial repercussions of such events are very real and should be taken seriously through proper food safety and risk management practices.

Mislabeling, undeclared allergens, foreign materials, under processing, adulteration, salmonella, listeria, E. coli, animal contaminants are the leading causes for food product withdraw/product recall. These are different exposures from product liability and are typically excluded on general liability policies.

Limitations in how insurance policies respond to loss caused by spoilage, refrigerant contamination, utility interruption and business interruption catch many food manufacturers off guard until a loss has occurred. Therefore, policies need to be structured to accept such claims prior to a loss.

Product recall policies should be purchased prior to entering into any vendor supply agreement as insurance buyers are often unaware of the terms of vendor supply agreements others in their company have entered with customers. Vendor supply agreements typically transfer risk to the food suppliers. Unless the food supplier has structured its insurance program to accept such transferred risk, the supplier has unknowingly created an uninsured gap in coverage.

Risks such as those mentioned above can have a material effect on your balance sheet unless management has anticipated and planned for them. Insurance buyers of food suppliers may not realize that standard insurance policies offer little, if any, protection for these perils. Insurance policies must be structured to provide coverage for each of these risks.
If you would like to learn how to protect your brand and balance sheet from a supply chain driven recall, please contact me directly.