Suppliers are now expected to cover more costs than ever before in the event of a recall.
BY DEBBIE DAY FOOD & BEVERAGE EXPERT, LOCKTON
Lockton’s data shows that globally, insurers received claims worth almost £40m during the first half of this year relating to product recalls. This is high by anyone’s standards. Last year the Food Standards Agency (FSA) investigated 1,645 incidents across the UK, the highest number for two years. This may surprise some, given the horsemeat scandal of 2013.
There is no doubt that we are seeing increases in food claims, with some individual claims running into millions of pounds. The recalls that follow some FSA investigations can occur for a variety of reasons: production faults, presence of bacteria and unapproved establishments to name a few.
Supermarkets and retailers are now demanding more from their suppliers when a food product needs to be recalled. Traditionally, the supplier would cover the costs of locating and destroying contaminated products as well as repaying affected consumers, but many retailers are now requiring suppliers to cover a myriad of other costs including charges for supermarkets’ loss of profits, premises investigations and administration fees. Substantial cover is therefore required to cover these costs, since the risks that product recalls pose to both supplier and retailer are growing.
Reputational damage is another risk which needs to be considered. The horsemeat scandal emphasised how swiftly a brand can be tarnished and the effect that can have on its sales and market share. Social media allows news to travel fast and a reputation which has taken years to build can be damaged in a matter of hours.
We have worked with a supplier whose client, a restaurant franchise, required them to pay for the costs of an entire marketing campaign which couldn’t go ahead after the key ingredient of a new product was recalled by the regulator. As innocuous as this might seem, it emphasises the shift from ‘traditional’ claims to the very different risks suppliers, in particular, find themselves liable for.
Whilst insurance is necessary to protect against a wide array of eventualities, it is also vital to ensure that the correct procedures are in place to deal with any situation when it arises. For suppliers, reducing exposure to these risks at source is absolutely key. For retailers, the creation of business interruption mitigation programmes to protect supply chains and incomes is essential: it’s crucial to have different options available if one distribution centre is unable to deliver the required stock.
Incidents like these are not always due to some form of contamination or investigation; this summer we saw lorries full of produce stuck in Kent and Calais, unable to complete their journeys due to other factors. Any disruption to the supply chain is a risk which needs to be mitigated, either through appropriate financial cover or effective interruption programmes.
The complexity of the food chain highlights the threat that recalls pose. Given how costly a recall can be – and the damage it can do to a company’s reputation – a comprehensive insurance policy is imperative to provide protection against the various impacts of such incidents. The good news for companies seeking to protect themselves against the fallout from a product recall is that a growing and increasingly diverse insurance market now exists to cater for their needs.
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