Nestlé Prepared Foods recalled approximately 762,615 pounds of Hot Pockets this month due to concerns they possibly contain glass and hard plastic. The recall, announced by the U.S. Department of Agriculture’s Food Safety and Inspection Service on January 15, followed four consumer complaints about extraneous materials inside the microwaveable filled pastry. One complaint reportedly involved an oral injury.
The recall applies to 54-ounce 12 packs of frozen pepperoni Hot Pockets with a best-by date of February 2022. The affected products were produced from November 13 to November 16 last year and shipped to retail stores across the U.S. According to the Food Inspection Service, the recall is considered a Class 1 recall, “where there is a reasonable probability that the use of the product will cause serious, adverse health consequences or death.”
“Over 762,000 pounds of product is a huge number to be recalled—just from a logistical and direct cost standpoint,” said Steve Bartell, Senior Broker, Casualty, Burns & Wilcox Brokerage, Chicago, Illinois. “From a brand image perspective, it is also substantial, as brand rehabilitation costs can prove to be the costliest aspect of a recall.”
Repairing reputational damage is one of many recall-associated expenses that a Product Recall Insurance policy can help mitigate. Such coverage is recommended and sometimes required for manufacturers, suppliers and distributors.
Recalls involving auto parts or food items may make headlines more often, but they impact companies in all sectors making all types of products.
Requirements to carry Product Recall Insurance coverage stem from the potential cost of a recall but also from their regularity. Indeed, several product recalls made headlines this month alone.
About 4,200 pounds of Bob Evans pork sausage were recalled1 January 21 over rubber contamination complaints and on January 16 Lake Champlain Chocolates recalled several types of chocolate bars2 after a consumer reportedly found brittle plastic pieces inside one of their products. On January 11, EVR Foods, Inc. announced a voluntary recall of its Lavva blueberry plant-based yogurt over possible mold contamination.3
“Contamination is a possibility in any sort of manufacturing operation,” said Allison Sinha, Senior Underwriter, Property & Casualty, Burns & Wilcox, Toronto, Ontario. “Despite the best precautions and adherence to guidelines, sometimes extraneous substances find their way into a finished product.”
Recall costs not limited to pulling products from shelves
Given that the average food recall price tag is $10 million in direct costs alone,4 Product Recall Insurance coverage can be the deciding factor between survival and financial devastation for many companies. “Any company selling any type of product should have Product Recall Insurance,” Sinha said. “The coverage is truly essential. When a government agency determines a product must be recalled, the only option is to recall that product. Regardless of the reason for the recall, the responsibility for executing it lies with the company that sells it.”
In 2019, the USDA’s Food Safety and Inspection Service reported 124 recalls involving 20,427,455 pounds of recalled product.5 The most common reasons for recall included contamination with extraneous materials and undeclared allergens. The Canadian Food Inspection Agency, meanwhile, manages about 350 recalls each year with its food safety partners.6
The average recall includes expenses related to collecting and disposing of affected products, notifying customers and retailers, replacing products and conducting an investigation into the source of the issue. “If a company does not have a Product Recall Insurance policy in place, it can face the prospect of bearing all of those costs,” Sinha said. “A manufacturer engaged in a recall typically must stop production. So not only does that company have to pull and replace products, it also cannot produce additional products.”
Depending on the policy, Product Recall Insurance could include coverage for lost income due to business interruption and also help an affected company recover from reputational damage related to the recall.
“Reputational damage following a recall can take different forms,” Sinha explained. “It could be customers moving to alternate brands when their usual brand is unavailable or customers hesitating to trust a brand—in either case, the recalled brand has lost customers.” Any form of reputational damage can be financially detrimental, she noted, which is why many Product Recall Insurance policies include coverage to help with brand rehabilitation costs. “Those expenses might come from offering product promotions like two-for-one deals or large-scale marketing campaigns.”
Every company in a product’s supply chain should have Product Recall Insurance.
In December, when Midwestern Pet Foods, Inc. first announced a voluntary recall of some of its pet food products that potentially contained unsafe levels of the mold-produced toxin aflatoxin, the company was aware of the deaths of 28 dogs and illness in eight others that appeared to be related to the contaminated food.7 As of January 21, the recall was expanded to include additional products and more than 110 dog deaths and 210 illnesses had been reported.8
Given consumers’ love for their pets, Bartell said, a pet food company could need substantial rebranding efforts following such a recall. “From a brand image standpoint, recovering from a product recall—rightly or wrongly—associated with pet illnesses and deaths could prove extremely challenging.”
Lawsuits and coverage challenges
Although help with costs for medical bills related to a recalled product may be included in a Product Recall Insurance policy, coverage to help with expenses stemming from lawsuits over additional damages or alleging negligence would likely be included in a company’s Commercial General Liability (CGL) Insurance or Products Liability Insurance policy.
A company may be able to reduce the likelihood of lawsuits if it is able to respond quickly and decisively following a recall, noted Sinha. “A company with a Product Recall Insurance policy that helps it step in right away to, for example, address production errors or even cover medical bills could be less vulnerable to recall-related lawsuits than one that lacks such resources,” she said.
Businesses at every point in a product’s supply chain could be affected by a recall. “Every company in a product’s supply chain should have Product Recall Insurance,” said Bartell, noting that a manufacturer could require its partners to carry this coverage.
When considering Product Recall Insurance needs, Sinha said, businesses should examine their contract requirements: “Companies that supply parts for manufacturers should investigate their obligations to the manufacturer if the parts they manufacture are involved in a recall.”
Obtaining the appropriate Product Recall Insurance coverage can be challenging for some business sectors, including the pet food industry and manufacturers of products like baking soda and powdered milk, which are sold in large quantities and end up in a multitude of products, said Bartell.
Automotive parts manufacturers and suppliers are contending with a challenging insurance market as well as a challenging recall landscape. According to the National Highway Traffic Safety Administration (NHTSA), the number of automotive recalls from 2010 through the third quarter of 2019 was about 81.8 percent higher than the previous decade.9 The NHTSA called the high-profile series of major airbag recalls from parts supplier Takata between 2002 and 2015 “the largest and most complex safety recall in U.S. history.”10
“Any product that has the potential to cause bodily injury can be recalled,” Sinha said. “Recalls involving auto parts or food items may make headlines more often, but they impact companies in all sectors making all types of products.”
Help with recall response
Some Product Recall Insurance policies include consultant services to assist companies with recall response as well as taking proactive measures before a recall occurs.
“It can be difficult to navigate these sorts of situations and work with various governing bodies,” Sinha pointed out. “Trained consultants can offer invaluable assistance in managing and recovering from a recall.”
The impact of a recall on affected manufacturers and related retailers can be significant. A Product Recall Insurance policy can include coverage to help with expenses related to third-party loss of income, said Sinha.
Unfortunately, Sinha added, manufacturers may mistakenly assume their CGL Insurance will help cover recall expenses. “Product Recall Insurance is a first-party coverage, meaning it helps mitigate losses that a company incurs directly, whereas a CGL Insurance policy is a third-party coverage, which applies in the event of a lawsuit,” she said. “So in the event of a product recall, coverage under a CGL Insurance policy would not include help with direct expenses.”
Company leaders need to ask themselves if they can financially sustain the financial and reputational costs associated with a product recall.
While some CGL Insurance or Products Liability Insurance policies can include supplemental coverage for recall costs, such coverage is often capped at $50,000. “When the average recall costs at least $10 million, a $50,000 supplement is wholly inadequate,” Bartell stressed.
Product Recall Insurance premiums have fallen for most policies in recent years, making robust coverage more accessible. “Company leaders need to ask themselves if they can financially sustain the financial and reputational costs associated with a product recall,” Bartell said.
Sinha agreed: “Product Recall Insurance offers vital safeguards for a company’s balance sheet,” she said. “The possibility that a recall can bankrupt a company is very real. It is imperative to consult an expert broker or agent to obtain suitable coverage.”
1 Hein, Alexandria. “Bob Evans recalls thousands of pounds of sausage after consumers find rubber in product.” Fox Business, January 22, 2021. 2 Spielman, Sharon. “Lake Champlain Chocolates issues voluntary recall on selected milk chocolate products.” Food Engineering Magazine, January 20, 2021. 3 “Lavva recalls a single lot of blueberry plant-based yogurt.” AM720 Chicago. WGN, January 15, 2021. 4 Heneghan, Carolyn. "More than money: What a recall truly costs." FoodDive, September 26, 2016. 5 U.S. Food Safety and Inspection Service. “Summary of Recall Cases in Calendar Year 2019.” United States Department of Agriculture, August 25, 2020. 6 Canadian Food Inspection Agency. “How it works: Canada's food safety system.” Government of Canada, November 27, 2020. 7 Fazio, Marie. “Pet Food Recall Is Expanded After 70 Dogs Die.” New York Times, January 13, 2021. 8 “FDA Alert: Certain Lots of Sportmix Pet Food Recalled for Potentially Fatal Levels of Aflatoxin.” U.S. Food and Drug Administration, January 26, 2021. 9 Wayland, Michael. “Recalls and corruption probes reshaped the auto industry heading into 2020s.” CNBC, December 28, 2019. 10 Consumer Reports. “Takata Airbag Recall: Everything You Need to Know.” Consumer Reports, January 20, 2021.