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The food industry’s product recall horror stories are well documented. The estimated $350 million lost by California’s spinach industry in 2006 and last month’s national recall of alfalfa sprouts from Caldwell Fresh Foods are business disruptions that keep executives awake at night with worry. It’s clear that the livelihoods of food producers, distributors and retailers can be at stake when a product recall occurs.

Risk management is crucial function of surviving a product recall crisis. A single product recall can affect multiple facets of your business. Many in the food industry are unaware of the true exposure their organizations face. There is risk at every point along the supply chain from field to fork, both before and after a claim occurs.  The details of contract language and business relationships can also increase complications.

In addition to a detailed contract analysis with growers, suppliers, packers, production and distribution partners to identify contingent responsibilities, a comprehensive insurance audit could save your company millions of dollars in the event of a product recall.

To understand the breadth of a company’s insurance coverage, it is important to know the difference between “product recall expense” policies and true “product recall” policies.  A typical product recall expense policy is limited in scope, generally addressing only the following items:

Food-borne pathogen contamination

Business income for lost product revenue

Removal of product

Disposal and clean up

Advertising to announce recall

On the other hand, true product recall policies can offer more comprehensive terms and flexibility.  Some of the additional expenses picked up on a true product recall policy would include costs associated with:

Identifying the cause of contamination-facility inspections

Crisis response

Cancellation of store slotting fees

Repair of the specific problem or rehabilitation of crop fields

Replacement of raw and finished goods/stock

Public relations consulting and response

Redistribution expense

Loss of income from vendor when entire product line is refused

Contingent business income

Income for your operation suffering a product recall loss due to a co-packer

As you can see, comprehensive product recall coverage can mean the difference between business disruption and possible insolvency.

Even companies that purchase comprehensive insurance plans may be unaware of the limitations of their product recall expense policies.  Simple terms like the time limitations on prior years of coverage may impact an organization much more for non-perishables whereas not so much on perishable food items.

Producers of packaged foods with long shelf lives have the ability to purchase an unlimited number of prior years of product recall coverage.  Having an insurance broker who understands the intricacies of the food business can help identify these terms and address them before a claim occurs.

Finally, food companies should carefully consider the deductible structure of their policies.  A standard product recall expense policy may employ a percentage deductible, which can quickly become very expensive if the recall is extensive.  Product recall policies offer the opportunity for companies to purchase coverage with a flat or capped deductible. This allows the company to manage financial risks associated with recalls because they will be aware of the maximum payout required if such an event should occur.

The complexities of product recall liability and loss are great.  Understanding your company’s contractual relationships, the terms of product recall insurance, if any, and true cost associated with a claim are greatly simplified with an experienced and knowledgeable team of legal and insurance advocates for your business.

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Joseph Talmadge is a commercial property and casualty broker for Heffernan Insurance Brokers, whose offices include one in Petaluma.