XL launches product contamination cover for supply chain risks

XL Insurance at Lloyd’s has developed an extension to its product contamination policy for the North American market that tackles the growing problem of supply chain-related product recalls for food and drink companies.

The policy is the first to offer broad-form cover for recalls in North America that result from adulterated or contaminated ingredients, a major factor in the rising number of product recalls in recent years.

Global supply chains heighten risk

XL Insurance developed its Adulterated Ingredient Product Recall cover in response to the rise in the number of product recalls in the US in recent years, driven in part by a surge in recalls resulting from contaminated ingredients.

“The exposures of food and drink companies have been increasing with the growth in the global supply chain and the more proactive approach of regulators in recent years, says Ed Mitchell, Global Product Recall Manager for XL Insurance. “The more that food and drink companies source their ingredients from around the world, the more prevalent the supply chain risk becomes,” he added.

When an ingredient is found to have been contaminated and is recalled, it can affect hundreds of downstream companies, says Mitchell. Where the regulator may once have recommended a recall of adulterated ingredients manufactured over the course of several days isolated to the contamination found, it increasingly recommends recalls of batches that may span weeks, months and even years. As a result the scope of product recalls has grown, dragging more companies into a single recall, he explains.

FDA ups its game

The more proactive approach of the US regulator, the Food and Drink Administration (FDA) is reflected in legislation currently working its way through the US Senate. This is likely to bring about tougher rules for food and drink companies, including mandatory product recalls.

“Mandatory product recalls would create a heightened risk environment for food and drink companies,” says Mitchell. “It is still a voluntary decision on whether or not to recall a product at present, but if the regulator is able to mandate a recall it will take the decision out of the hands of the company.”

A contaminated product can be costly, both financially and in terms of lives. For example, nine people died and 714 fell ill when a salmonella outbreak struck the US peanut industry last year. The resulting recall - the largest in US history - is estimated to have cost the sector over $1bn and affected hundreds of food firms that used peanuts as ingredients supplied by the now bankrupt Peanut Corp. of America.

The potential contamination of a product is of huge importance to any food company, says Mark Colgate of R K Harrison Insurance Brokers Ltd: “If their product suffers any concerns over its integrity, whether accurate or not, the food company will likely suffer some damage to its sales and ultimately to its brand and reputation," he says. "With the regulators in the US seemingly cracking down harder on food companies and stricter food regulations in the pipeline the opportunity for a potential contamination is getting ever greater and this is clearly highlighted by the jump in recent recalls.”

FDA recalls have steadily risen from 236 in 2006 to 283 in 2008, leaping to 557 in 2009 as a result of the Peanut Corp. of America.

Filling the gap in cover

In the case of last year’s peanut contamination, many firms faced costly recalls, even though their products were not necessarily harmful in themselves. Product contamination insurance - which typically only pays claims when a product is considered harmful - would not usually have covered such losses.

An increasing number of food and drink companies are purchasing product recall insurance, with many more companies enquiring of its availability and applicability to their business, says Colgate

“At present, most recall policies would not pay claims unless the companies’ product is considered injurious,” he says. “Clearly different companies have different hot buttons and by providing positive cover for adulterated ingredients XL will likely make some food and drink companies re-evaluate the viability of recall insurance.”

The adulterated ingredient cover that XL Insurance has developed goes right to the heart of the risks food and drink companies are exposed to, says Mitchell. “Most food and drink companies have a good handle on their own risks, but supply chain exposures and regulatory risks - probably the biggest faced by the food and drink sector - are far less controllable.”